Meyer in the Hoover administration In the midst of a German and the American
bank crisis and a growing depression, Eugene Meyer battled the totally Morgan-run New York
Fed for dominance over the Federal Reserve system.
The Morgans were even more interested than Meyer in bailing out the European banking
systems.
In late June 1931, the New York Fed agreed to participate with the Bank of England, the
Bank of France and the Bank for International Settlements in a $100 million loan to try
to bail out the German Reichsbank.
Soon, the Germans were asking for $500 million more to save their banking system.
While Harrison was sympathetic, Meyer and the other bankers felt this was too much of
a long-term commitment.
The German government then asked the Fed, not only for the extra loan, but also for
for a reassuring statement, clearly mendacious, hailing the, quote, fundamental soundness
of the German economy.
Happening to be in New York in the midst of this German crisis on the weekend of July
12th, Meyer found out by accident of a secret meeting at the New York Fed on the crisis
with the top Morgan people in the administration, including Morgan partners Russell Leffingwell
and S. Parker Gilbert, Albert Wiggin, Head of the Morgan Run Chase National Bank, Acting
Treasury Secretary Ogden Mills, Owen D. Young, Chairman of the Morgan Run General Electric,
and from the New York Fed, Governor George Harrison and Deputy Governor W. Randolph Burgess.
The meeting had already persuaded President Hoover to issue a statement of sympathy for
the German situation.
Mayer, at this point, went ballistic, insisting that the President's statement, backed by a meeting of top banking worthies, would be taken by the Germans, as well as everyone else, as a quote, moral commitment to help the Germans, end quote, which would either lead to a disastrous blank check support for German finance, or would make matters worse when that support was repudiated.
Mayer also insisted that only the Federal Reserve Board in Washington could legally commit the Fed to such action.
By his last-minute intervention, Mayer was fortunately able to block the Morgan cabal from getting Hoover to make the public endorsement.
The following week, Hoover, aided by veteran Morgan-oriented lawyer and Secretary of State Henry L. Stimson, agitated again for direct loans to Germany,
Germany.
But Meyer was able to confine Hoover to engineering a Meyer-approved big power, quote, standstill
agreement, by which banks throughout the major countries of the world would continue to hold
German and other Central European short-term debts without trying to get out of German
marks and other shaky currencies of that region.
Generally, Meyer was able to overrule Harrison.
Thus, when gold flowed out of US banks after Britain's disastrous abandonment of the gold
standard in late September, Meyer was able to force Harrison, wedded to cheap money,
to raise the New York Fed's discount rate from 1.5% to 3.5% in October, thereby reversing
the gold drain by raising market confidence in the dollar.
By early September 1931, even before Britain's abandonment of the gold standard, President
Hoover, Eugene Mayer, and the nation's financial establishment all agreed that America required
a massive infusion of more money and credit under the direction of the federal government.
There was one difference.
Whereas Mayer and the bankers wanted a revival of the war finance corporation for government
And to pour in the new money directly, Hoover first wanted to try a dab of his characteristic
government-business partnership to encourage private bankers to contribute the necessary
hundreds of millions of dollars to a federal agency.
Hoover set up his National Credit Corporation, or NCC, to attract $500 million from the banks
in order to shore up shaky individual banks.
But when the National Credit Corporation was only able to raise $150 million, Hoover quickly
and cheerfully threw in the towel, and by the end of November, agreed to introduce a
bill into Congress to revive the old WFC and expand it for peacetime uses into a new Reconstruction
Finance Corporation, or RFC.
The RFC bill, which sailed through Congress by late January 1932, provided for the Treasury
The Theory to pour $500 million of capital into the Reconstruction Finance Corporation,
which was empowered to issue securities up to an additional $1.5 billion.
The RFC could make loans to banks and financial institutions of all types.
The theory was that, ensured of freedom from failing, the timid banks would be emboldened
to lend massively to business and industry, the money supply would dramatically rise,
and Prosperity would return.
This was the doctrine trumpeted by President Hoover, Meyer, Mills, and Undersecretary of
the Treasury Arthur A. Ballantine, a partner of the law firm headed by long-time Morgan
attorney Elihu Root.
Unsurprisingly, the representatives of groups expecting a massive infusion of federal money,
commercial banks, savings banks, life insurance companies, and building and loan, in later
In addition, the RFC was empowered to lend money to railroads in order to relieve their
indebtedness and revivify the railroad bond market.
The railroad representatives were also delighted with the bill.
Hoover's original bill was even more sweeping, also allowing the RFC to make business loans
to quote, bonafide institutions, but the Senate Democrats, suspicious of excessive executive
power over business, killed this proposal.
The Senate Democrats also reportedly extracted a promise from Hoover to make the beloved
Eugene Meyer chairman of the new RFC.
Meyer, doing double duty as governor of the Federal Reserve Board and head of the RFC,
was now the most powerful single economic and financial force in the federal government.
The RFC, at the Democrats' insistence, was to have a board of directors consisting of
four Republicans and three Democrats.
Three of the Republicans were the ex-officio heads of the Federal Reserve Board, Chairman
Stephen Mayer, the Secretary of the Treasury, Ogden Mills, who had replaced Mellon in January,
and of the Federal Farm Loan Board, Paul Bester, Mayer's protege and successor.
The fourth Republican appointee was former Vice President Charles G. Dawes, a Chicago
railroad man in the Morgan ambit.
The RFC was not only patterned after the old war finance corporation in philosophy, but
but also aped its organizational structure and took over many of the WFC's actual personnel.
The General Council and the three top examiners of the WFC happily took up their old posts,
while the first secretary of the RFC was George Cookecy, a former director of the WFC who
had been a member of that outfit's remarkably leisurely liquidation committee from 1929
until he assumed his new position in the RFC.
Like the War Finance Corporation, the RFC established eight divisions as well as 33
local loan agencies.
Each of these loan agencies established an advisory committee consisting of the leading
local bankers to scrutinize and pass on loan applications.
This arrangement placed tremendous political and financial power into the hands of local
bankers armed with federal power.
Moreover, the Reconstruction Finance Corporation was not required to reveal the names of borrowers or the amounts of its loans to Congress or to the public.
A tremendous political and economic power was thus placed in the RFC and bankers associated with it.
Even progressive Senator George Norris of Nebraska lamented that he had never envisioned, quote,
putting the government into business as far as this bill would put it, end quote.
Hoover and his associates rationalized this power as being a temporary necessity to handle an emergency, supposedly much like World War I, when the prototype of the RFC had been established.
Thus, Hoover repeatedly spoke of fighting the Depression as the equivalent of fighting a war.
We are engaged in a fight upon a hundred fronts, just as positive, just as definite, and requiring
just as greatly the moral courage, the organized action, the unity of strength, and the sense
of devotion in every community as in war.
Eugene Meyer spoke repeatedly in military metaphors, and Secretary Mills spoke of the
War Against Depression, being fought on many fronts, especially the quote, long battle
to carry our financial structure through the worldwide collapse, end quote.
And so too did business and financial leaders rationalize their hasty embrace of collectivism
in the Reconstruction Finance Corporation.
An illuminating article in the magazine of Wall Street summarizing the congressional
The answer made by representatives of business to the charge of socialism is that in all
In all great emergencies, war for example, governments have always thrown themselves
into the breach because only they can organize and mobilize the whole strength of the nation.
In war, every country becomes practically a dictatorship and every man's resources
are at its command.
The country is now in an equally great emergency."
The RFC certainly paid off for these favored business groups.
The excuse for the secrecy was that public confidence would be weakened if the identity
of the shaky business or bank receiving RFC loans became widely known.
But of course, these institutions, precisely because they were in weak and unsound shape,
deserve to lose public confidence, and the sooner the better, both for the public and
for the health of the economy, which required the rapid liquidation of unsound investments
and institutions.
In the first five months of operation, from February to June 1932, the RFC made one billion
dollars of loans, of which 60% went to banks and 25% to railroads.
The theory was that railroad bonds must be protected, since many of these securities
were held by savings banks and insurance companies, alleged agents of the small investor.
In practice, the bulk of these RFC railroad loans went to repaying debt.
About a third of these loans went to repaying railroad debts to banks.
Thus, one of the first RFC loans was $5.75 million to the Missouri Pacific Railroad to
repay its debt to J.P. Morgan & Company, and an $8 million loan to the B&O Railroad to
repay its debt to Kuhn-Lebin Company.
One of the main enthusiasts for this policy was Eugene Meyer, who touted it as, quote,
Promoting Recovery by, quote, putting more money into the banks.
It certainly did the latter, at the expense of the taxpayers and of propping up inefficient
banks and businesses.
The loan to Missouri Pacific was a particularly egregious case, for as soon as Missouri Pacific
performed its task of repaying its debt to Morgan, it was gently allowed to go into bankruptcy.
Another consequence of RFC bailout loans to railroads was to accelerate the socialization
of the Railroad Industry, since the RFC, as a large-scale creditor, was able to place
government directors on the board of the railroads reorganized after bankruptcy.
While the Democrats in Congress had their way after August in forcing the RFC to report
to Congress on its loans, President Hoover had his way in finally persuading Congress
to transform the RFC into a bold, quote, positive agency empowered to make new loans, to engage
To make agent capital loans, to finance sales of agriculture at home and abroad, and to
make loans to states and cities, instead of being merely an agency defending indebted
banks and railroads.
This amendment to the RFC Act, the Emergency Relief and Construction Act of 1932, passed
Congress at the end of July and increased the RFC's authorized capital to $3.4 billion.
Eugene Meyer, suffering from exhaustion, persuaded Hoover to include in the amended bill the
separation of the ex officio members from the RFC.
But Meyer's double-duty work was greatly appreciated by Felix Frankfurter, soon to
be one of the major gurus of the Roosevelt New Deal.
Frankfurter telegraphed Meyer's wife that, quote, Jean has been the only brave and effective
Free Market Financial Writer John T. Flynn had a very different assessment of the year
of the Hoover-Meyer Reconstruction Finance Corporation.
Flynn pointed out that RFC loans only prolonged the depression by maintaining the level of
debt.
Income must be freed for purchasing by the extinguishment of excessive debts, any attempt
to Save the Weaker Debtors Necessarily Prolongs the Depression.
Railroads should not be hampered from going into the inevitable curative process of bankruptcy.
In the meantime, Eugene Meyer was promoting more inflationary damage as governor of the
Federal Reserve.
Meyer managed to persuade both Hoover and Virginia conservative Carter Glass, leading
Democrat on the Senate Banking Committee, to push through the Glass-Steagall Act at
at the end of February, which allowed the Fed to use U.S. government securities in addition
to gold as collateral for Federal Reserve notes, which were, of course, still redeemable
in gold.
This act enabled the Federal Reserve to greatly expand credit and to lower interest rates.
The Fed promptly went into an enormous binge of buying government securities, unprecedented
at the time.
The Fed purchased $1.1 billion of government securities from the end of February to the
at the end of July, raising its holdings to $1.8 billion.
Part of the reason for these vast open market operations was to help finance the then huge
federal deficit of $3 billion during fiscal year 1932.
Thus, we see the grave error of the familiar Milton Friedman monetarist myth that the Federal
Reserve either deliberately contracted the money supply after 1931 or at least passively
allowed such contraction.
The Fed, under Meyer, did its mightiest to inflate the money supply, yet despite its
efforts, total bank reserves only rose by $212 million, while the total money supply
fell by $3 billion.
How could this be?
The answer to the mystery is that the inflationary policies of Hoover and Meyer proved to be counterproductive.
American citizens lost confidence in the banks and demanded cash, Federal Reserve notes,
For their deposits, currency and circulation rising by $122 million by the end of July,
while foreigners lost confidence in the dollar and demanded gold, the gold stock in the United
States falling by $380 million in this period.
In addition, the banks, for the first time, did not fully lend out their new reserves
and accumulated excess reserves, these excess reserves rising to 10% of total reserves
by mid-year.
A common explanation claims that business, during a depression, lowered its demand for
loans so that pumping new reserves into banks was only, quote, pushing on a string.
But this popular view overlooks the fact that banks can always use their excess reserves
to buy existing securities.
They don't have to wait for new loan requests.
Why didn't they do so?
Because the banks were whipsawed between two forces.
On the one hand, bank failures had increased dramatically during the Depression, whereas
during the 1920s, in a typical year 700 banks failed, with deposits totaling $170 million.
Since the Depression struck, 17,000 banks had been failing per year, with a total of
$1.08 billion in deposits.
This increase in bank failures could give any bank pause, especially since all the banks
Banks knew in their hearts that, as fractional reserve banks, none of them could withstand
determined and massive runs upon them by their depositors.
Second, just at a time when bank loans were becoming risky, the cheap money policy of
the Fed had driven down interest returns from bank loans, thus weakening banks' incentive
to bear risk, hence the piling up of excess reserves.
The more that Hoover and the Fed tried to inflate, the more worried the market and the
public became about the dollar, the more gold flowed out of the banks, and the more deposits
were redeemed for cash.
Professor Seymour Harris, writing at the time and years before he became one of America's
leading Keynesians, concluded perceptively that the hard-money critics of the Hoover
administration might have been right, and that it might be that the Fed's heavy open-market
Purchases of Government Securities from 1930 to 1932, quote, retarded the process of liquidation
and reduction of costs, and therefore have accentuated the depression, end quote.
Herbert Hoover, of course, reacted quite differently to the abject failure of his inflationist
program.
Instead of blaming himself, he blamed the banks and the public.
The banks were to blame by piling up excess reserves instead of making dangerous loans.
By late May, Hoover was, quote, disturbed at the apparent lack of cooperation of the
commercial banks of the country in the credit expansion drive, end quote.
Eugene Myers' successor at the RFC, former Ohio Democratic Senator Alty Pomerin, denounced
the laggard banks bitterly, quote, I measure my words, the bank that is 75% liquid or more
Hoover also went to the length of getting Treasury Secretary Ogden Mills to organize
bankers and businessmen to lend or borrow the surplus credit piled up in the banks.
Mills established a committee in New York City on May 19, headed by Owen D. Young, chairman
President of the Board of Morgan's General Electric Corporation and the Young Committee
tried to organize a cartel to support bond prices, but the committee, despite its distinguished
personnel, failed dismally to form a cartel that could defeat market forces.
The idea died quickly.
Not content with denouncing the banks, President Hoover also railed against the public for
For Cashing in Bank Deposits for Cash or Gold Stung by the public's redeeming $800 million
of bank deposits for cash during 1931, Hoover organized a hue and cry against quote, traitorous
hoarding.
On February 3rd, 1932, Hoover established a new Citizens Reconstruction Organization
or CRO headed by Colonel Frank Knox of Chicago.
The cry went up from the CRO that the hoarder is unpatriotic because he restricts and destroys
credit.
That is, by trying to redeem their own property and by trying to get banks to redeem their
false and misleading promises, the hoarders were exposing the unsound nature of the bank
credit system.
On February 6th, top-level anti-hoarding patriots met to coordinate the drive.
They included General Charles Dawes, Eugene Meyer, Secretary of Commerce Robert P. Lamont,
and Treasury Secretary Ogden Mills.
A month later, Hoover delivered a public address on the evils of hoarding, quote,
The battlefront today is against the hoarding of currency, end quote, which prevents money
from going into active circulation and thereby lifting us out of the depression.
John Hoover later took credit for this propaganda drive putting a check on hoarding, and it
is true that cash and circulation reached a peak of $5.44 billion in July 1932, not
rising above that until the culminating bank crisis in February 1933.
But if true, so much the worse, for that means that bank liquidation was postponed for a
Every year until the final banking crisis of 1933.