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NOTE 45. Meyer in the Hoover Administration

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Meyer in the Hoover administration In the midst of a German and the American

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bank crisis and a growing depression, Eugene Meyer battled the totally Morgan-run New York

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Fed for dominance over the Federal Reserve system.

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The Morgans were even more interested than Meyer in bailing out the European banking

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systems.

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In late June 1931, the New York Fed agreed to participate with the Bank of England, the

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Bank of France and the Bank for International Settlements in a $100 million loan to try

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to bail out the German Reichsbank.

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Soon, the Germans were asking for $500 million more to save their banking system.

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While Harrison was sympathetic, Meyer and the other bankers felt this was too much of

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a long-term commitment.

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The German government then asked the Fed, not only for the extra loan, but also for

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for a reassuring statement, clearly mendacious, hailing the, quote, fundamental soundness

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of the German economy.

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Happening to be in New York in the midst of this German crisis on the weekend of July

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12th, Meyer found out by accident of a secret meeting at the New York Fed on the crisis

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with the top Morgan people in the administration, including Morgan partners Russell Leffingwell

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and S. Parker Gilbert, Albert Wiggin, Head of the Morgan Run Chase National Bank, Acting

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Treasury Secretary Ogden Mills, Owen D. Young, Chairman of the Morgan Run General Electric,

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and from the New York Fed, Governor George Harrison and Deputy Governor W. Randolph Burgess.

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The meeting had already persuaded President Hoover to issue a statement of sympathy for

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the German situation.

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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.

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Mayer also insisted that only the Federal Reserve Board in Washington could legally commit the Fed to such action.

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By his last-minute intervention, Mayer was fortunately able to block the Morgan cabal from getting Hoover to make the public endorsement.

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The following week, Hoover, aided by veteran Morgan-oriented lawyer and Secretary of State Henry L. Stimson, agitated again for direct loans to Germany,

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Germany.

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But Meyer was able to confine Hoover to engineering a Meyer-approved big power, quote, standstill

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agreement, by which banks throughout the major countries of the world would continue to hold

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German and other Central European short-term debts without trying to get out of German

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marks and other shaky currencies of that region.

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Generally, Meyer was able to overrule Harrison.

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Thus, when gold flowed out of US banks after Britain's disastrous abandonment of the gold

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standard in late September, Meyer was able to force Harrison, wedded to cheap money,

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to raise the New York Fed's discount rate from 1.5% to 3.5% in October, thereby reversing

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the gold drain by raising market confidence in the dollar.

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By early September 1931, even before Britain's abandonment of the gold standard, President

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Hoover, Eugene Mayer, and the nation's financial establishment all agreed that America required

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a massive infusion of more money and credit under the direction of the federal government.

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There was one difference.

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Whereas Mayer and the bankers wanted a revival of the war finance corporation for government

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And to pour in the new money directly, Hoover first wanted to try a dab of his characteristic

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government-business partnership to encourage private bankers to contribute the necessary

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hundreds of millions of dollars to a federal agency.

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Hoover set up his National Credit Corporation, or NCC, to attract $500 million from the banks

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in order to shore up shaky individual banks.

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But when the National Credit Corporation was only able to raise $150 million, Hoover quickly

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and cheerfully threw in the towel, and by the end of November, agreed to introduce a

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bill into Congress to revive the old WFC and expand it for peacetime uses into a new Reconstruction

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Finance Corporation, or RFC.

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The RFC bill, which sailed through Congress by late January 1932, provided for the Treasury

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The Theory to pour $500 million of capital into the Reconstruction Finance Corporation,

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which was empowered to issue securities up to an additional $1.5 billion.

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The RFC could make loans to banks and financial institutions of all types.

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The theory was that, ensured of freedom from failing, the timid banks would be emboldened

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to lend massively to business and industry, the money supply would dramatically rise,

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and Prosperity would return.

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This was the doctrine trumpeted by President Hoover, Meyer, Mills, and Undersecretary of

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the Treasury Arthur A. Ballantine, a partner of the law firm headed by long-time Morgan

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attorney Elihu Root.

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Unsurprisingly, the representatives of groups expecting a massive infusion of federal money,

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commercial banks, savings banks, life insurance companies, and building and loan, in later

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In addition, the RFC was empowered to lend money to railroads in order to relieve their

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indebtedness and revivify the railroad bond market.

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The railroad representatives were also delighted with the bill.

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Hoover's original bill was even more sweeping, also allowing the RFC to make business loans

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to quote, bonafide institutions, but the Senate Democrats, suspicious of excessive executive

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power over business, killed this proposal.

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The Senate Democrats also reportedly extracted a promise from Hoover to make the beloved

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Eugene Meyer chairman of the new RFC.

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Meyer, doing double duty as governor of the Federal Reserve Board and head of the RFC,

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was now the most powerful single economic and financial force in the federal government.

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The RFC, at the Democrats' insistence, was to have a board of directors consisting of

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four Republicans and three Democrats.

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Three of the Republicans were the ex-officio heads of the Federal Reserve Board, Chairman

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Stephen Mayer, the Secretary of the Treasury, Ogden Mills, who had replaced Mellon in January,

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and of the Federal Farm Loan Board, Paul Bester, Mayer's protege and successor.

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The fourth Republican appointee was former Vice President Charles G. Dawes, a Chicago

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railroad man in the Morgan ambit.

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The RFC was not only patterned after the old war finance corporation in philosophy, but

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but also aped its organizational structure and took over many of the WFC's actual personnel.

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The General Council and the three top examiners of the WFC happily took up their old posts,

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while the first secretary of the RFC was George Cookecy, a former director of the WFC who

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had been a member of that outfit's remarkably leisurely liquidation committee from 1929

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until he assumed his new position in the RFC.

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Like the War Finance Corporation, the RFC established eight divisions as well as 33

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local loan agencies.

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Each of these loan agencies established an advisory committee consisting of the leading

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local bankers to scrutinize and pass on loan applications.

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This arrangement placed tremendous political and financial power into the hands of local

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bankers armed with federal power.

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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.

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A tremendous political and economic power was thus placed in the RFC and bankers associated with it.

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Even progressive Senator George Norris of Nebraska lamented that he had never envisioned, quote,

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putting the government into business as far as this bill would put it, end quote.

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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.

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Thus, Hoover repeatedly spoke of fighting the Depression as the equivalent of fighting a war.

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We are engaged in a fight upon a hundred fronts, just as positive, just as definite, and requiring

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just as greatly the moral courage, the organized action, the unity of strength, and the sense

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of devotion in every community as in war.

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Eugene Meyer spoke repeatedly in military metaphors, and Secretary Mills spoke of the

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War Against Depression, being fought on many fronts, especially the quote, long battle

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to carry our financial structure through the worldwide collapse, end quote.

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And so too did business and financial leaders rationalize their hasty embrace of collectivism

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in the Reconstruction Finance Corporation.

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An illuminating article in the magazine of Wall Street summarizing the congressional

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The answer made by representatives of business to the charge of socialism is that in all

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In all great emergencies, war for example, governments have always thrown themselves

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into the breach because only they can organize and mobilize the whole strength of the nation.

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In war, every country becomes practically a dictatorship and every man's resources

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are at its command.

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The country is now in an equally great emergency."

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The RFC certainly paid off for these favored business groups.

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The excuse for the secrecy was that public confidence would be weakened if the identity

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of the shaky business or bank receiving RFC loans became widely known.

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But of course, these institutions, precisely because they were in weak and unsound shape,

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deserve to lose public confidence, and the sooner the better, both for the public and

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for the health of the economy, which required the rapid liquidation of unsound investments

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and institutions.

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In the first five months of operation, from February to June 1932, the RFC made one billion

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dollars of loans, of which 60% went to banks and 25% to railroads.

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The theory was that railroad bonds must be protected, since many of these securities

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were held by savings banks and insurance companies, alleged agents of the small investor.

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In practice, the bulk of these RFC railroad loans went to repaying debt.

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About a third of these loans went to repaying railroad debts to banks.

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Thus, one of the first RFC loans was $5.75 million to the Missouri Pacific Railroad to

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repay its debt to J.P. Morgan & Company, and an $8 million loan to the B&O Railroad to

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repay its debt to Kuhn-Lebin Company.

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One of the main enthusiasts for this policy was Eugene Meyer, who touted it as, quote,

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Promoting Recovery by, quote, putting more money into the banks.

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It certainly did the latter, at the expense of the taxpayers and of propping up inefficient

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banks and businesses.

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The loan to Missouri Pacific was a particularly egregious case, for as soon as Missouri Pacific

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performed its task of repaying its debt to Morgan, it was gently allowed to go into bankruptcy.

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Another consequence of RFC bailout loans to railroads was to accelerate the socialization

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of the Railroad Industry, since the RFC, as a large-scale creditor, was able to place

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government directors on the board of the railroads reorganized after bankruptcy.

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While the Democrats in Congress had their way after August in forcing the RFC to report

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to Congress on its loans, President Hoover had his way in finally persuading Congress

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to transform the RFC into a bold, quote, positive agency empowered to make new loans, to engage

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To make agent capital loans, to finance sales of agriculture at home and abroad, and to

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make loans to states and cities, instead of being merely an agency defending indebted

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banks and railroads.

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This amendment to the RFC Act, the Emergency Relief and Construction Act of 1932, passed

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Congress at the end of July and increased the RFC's authorized capital to $3.4 billion.

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Eugene Meyer, suffering from exhaustion, persuaded Hoover to include in the amended bill the

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separation of the ex officio members from the RFC.

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But Meyer's double-duty work was greatly appreciated by Felix Frankfurter, soon to

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be one of the major gurus of the Roosevelt New Deal.

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Frankfurter telegraphed Meyer's wife that, quote, Jean has been the only brave and effective

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Free Market Financial Writer John T. Flynn had a very different assessment of the year

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of the Hoover-Meyer Reconstruction Finance Corporation.

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Flynn pointed out that RFC loans only prolonged the depression by maintaining the level of

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debt.

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Income must be freed for purchasing by the extinguishment of excessive debts, any attempt

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to Save the Weaker Debtors Necessarily Prolongs the Depression.

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Railroads should not be hampered from going into the inevitable curative process of bankruptcy.

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In the meantime, Eugene Meyer was promoting more inflationary damage as governor of the

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Federal Reserve.

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Meyer managed to persuade both Hoover and Virginia conservative Carter Glass, leading

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Democrat on the Senate Banking Committee, to push through the Glass-Steagall Act at

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at the end of February, which allowed the Fed to use U.S. government securities in addition

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to gold as collateral for Federal Reserve notes, which were, of course, still redeemable

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in gold.

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This act enabled the Federal Reserve to greatly expand credit and to lower interest rates.

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The Fed promptly went into an enormous binge of buying government securities, unprecedented

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at the time.

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The Fed purchased $1.1 billion of government securities from the end of February to the

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at the end of July, raising its holdings to $1.8 billion.

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Part of the reason for these vast open market operations was to help finance the then huge

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federal deficit of $3 billion during fiscal year 1932.

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Thus, we see the grave error of the familiar Milton Friedman monetarist myth that the Federal

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Reserve either deliberately contracted the money supply after 1931 or at least passively

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allowed such contraction.

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The Fed, under Meyer, did its mightiest to inflate the money supply, yet despite its

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efforts, total bank reserves only rose by $212 million, while the total money supply

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fell by $3 billion.

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How could this be?

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The answer to the mystery is that the inflationary policies of Hoover and Meyer proved to be counterproductive.

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American citizens lost confidence in the banks and demanded cash, Federal Reserve notes,

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For their deposits, currency and circulation rising by $122 million by the end of July,

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while foreigners lost confidence in the dollar and demanded gold, the gold stock in the United

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States falling by $380 million in this period.

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In addition, the banks, for the first time, did not fully lend out their new reserves

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and accumulated excess reserves, these excess reserves rising to 10% of total reserves

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by mid-year.

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A common explanation claims that business, during a depression, lowered its demand for

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loans so that pumping new reserves into banks was only, quote, pushing on a string.

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But this popular view overlooks the fact that banks can always use their excess reserves

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to buy existing securities.

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They don't have to wait for new loan requests.

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Why didn't they do so?

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Because the banks were whipsawed between two forces.

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On the one hand, bank failures had increased dramatically during the Depression, whereas

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during the 1920s, in a typical year 700 banks failed, with deposits totaling $170 million.

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Since the Depression struck, 17,000 banks had been failing per year, with a total of

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$1.08 billion in deposits.

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This increase in bank failures could give any bank pause, especially since all the banks

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Banks knew in their hearts that, as fractional reserve banks, none of them could withstand

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determined and massive runs upon them by their depositors.

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Second, just at a time when bank loans were becoming risky, the cheap money policy of

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the Fed had driven down interest returns from bank loans, thus weakening banks' incentive

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to bear risk, hence the piling up of excess reserves.

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The more that Hoover and the Fed tried to inflate, the more worried the market and the

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public became about the dollar, the more gold flowed out of the banks, and the more deposits

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were redeemed for cash.

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Professor Seymour Harris, writing at the time and years before he became one of America's

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leading Keynesians, concluded perceptively that the hard-money critics of the Hoover

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administration might have been right, and that it might be that the Fed's heavy open-market

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Purchases of Government Securities from 1930 to 1932, quote, retarded the process of liquidation

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and reduction of costs, and therefore have accentuated the depression, end quote.

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Herbert Hoover, of course, reacted quite differently to the abject failure of his inflationist

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program.

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Instead of blaming himself, he blamed the banks and the public.

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The banks were to blame by piling up excess reserves instead of making dangerous loans.

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By late May, Hoover was, quote, disturbed at the apparent lack of cooperation of the

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commercial banks of the country in the credit expansion drive, end quote.

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Eugene Myers' successor at the RFC, former Ohio Democratic Senator Alty Pomerin, denounced

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the laggard banks bitterly, quote, I measure my words, the bank that is 75% liquid or more

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Hoover also went to the length of getting Treasury Secretary Ogden Mills to organize

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bankers and businessmen to lend or borrow the surplus credit piled up in the banks.

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Mills established a committee in New York City on May 19, headed by Owen D. Young, chairman

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President of the Board of Morgan's General Electric Corporation and the Young Committee

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tried to organize a cartel to support bond prices, but the committee, despite its distinguished

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personnel, failed dismally to form a cartel that could defeat market forces.

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The idea died quickly.

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Not content with denouncing the banks, President Hoover also railed against the public for

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For Cashing in Bank Deposits for Cash or Gold Stung by the public's redeeming $800 million

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of bank deposits for cash during 1931, Hoover organized a hue and cry against quote, traitorous

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hoarding.

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On February 3rd, 1932, Hoover established a new Citizens Reconstruction Organization

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or CRO headed by Colonel Frank Knox of Chicago.

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The cry went up from the CRO that the hoarder is unpatriotic because he restricts and destroys

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credit.

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That is, by trying to redeem their own property and by trying to get banks to redeem their

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false and misleading promises, the hoarders were exposing the unsound nature of the bank

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credit system.

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On February 6th, top-level anti-hoarding patriots met to coordinate the drive.

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They included General Charles Dawes, Eugene Meyer, Secretary of Commerce Robert P. Lamont,

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and Treasury Secretary Ogden Mills.

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A month later, Hoover delivered a public address on the evils of hoarding, quote,

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The battlefront today is against the hoarding of currency, end quote, which prevents money

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from going into active circulation and thereby lifting us out of the depression.

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John Hoover later took credit for this propaganda drive putting a check on hoarding, and it

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is true that cash and circulation reached a peak of $5.44 billion in July 1932, not

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rising above that until the culminating bank crisis in February 1933.

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But if true, so much the worse, for that means that bank liquidation was postponed for a

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Every year until the final banking crisis of 1933.