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Economic Error #10: Roosevelt's New Deal Allocated Capital Far Better Than the Free Market.

Gary North
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Ellen Brown praises the Reconstruction Finance Corporation, which used taxpayers' money to fund businesses that private investors thought would lose money.

Hoover had set up the Reconstruction Finance Corporation (RFC) in 1932 as a federally-owned bank that would bail out commercial banks by extending loans to them; but Hoover's ploy failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and to invest. Roosevelt used Hoover's new government-owned lending facility to extend loans where they were needed most --- for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the machinery needed to become the world's industrial leader after the war. [Web of Debt, p. 156]

The RFC was the TARP of its day. It made loans to banks, contrary to Brown. Free market economist Murray Rothbard devoted a lot of space to it in his study of Hoover's Administration in 1932. It was a political payoff.

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. 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 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.

The RFC was "Payoffs R Us" from day one.

What about the RFC under Roosevelt? Free market journalist Garet Garrett described this policy in 1938 in his essay, The Revolution Was.

But the New Deal had a train of federal lending agencies ready to start. The locomotive was the Reconstruction Finance Corporation. The signal for the train to start was a blast of propaganda denouncing Wall Street, the banks and all private owners of capital for their unwillingness to lend. So the government, in their place, became the great provider of credit and capital for all purposes. It loaned public funds to farmers and home owners to enable them to pay off their mortgages; it loaned also to banks, railroads, business, industry, new enterprise, even to foreign borrowers.

Thereby private debt was converted into public debt in a very large and popular way. It was popular because the government, having none of the problems of a bank or a private lender, with no fetish of solvency to restrain it, with nothing really to lose even though the money should never come back, was a benevolent lender. It loaned public money to private borrowers on terms and at rates of interest with which no bank nor any private lender could compete; and the effect was to create a kind of fictitious, self-serving necessity. The government could say to the people, and did say to them: "Look. It is as we said. The money changers, hating the New Deal, are trying to make a credit famine. But your government will beat them."

In a fireside chat, October 22, 1933, the president said,

I have publicly asked that foreclosures on farms and chattels and on homes be delayed until every mortgagor in the country shall have had full opportunity to take advantage of Federal credit. I make the further request, which many of you know has already been made through the great Federal credit organizations, that if there is any family in the United States about to lose its home or about to lose its chattels, that family should telegraph at once either to the Farm Credit Administration or to the Home Owners Loan Corporation in Washington requesting their help. Two other great agencies are in full swing. The Reconstruction Finance Corporation continues to lend large sums to industry and finance, with the definite objective of making easy the extending of credit to industry, commerce and finance.

The other great lending agency to which he referred was the one that dispensed federal credit to states, cities, towns, and worthy private organizations for works of public and social benefit. In the same fireside chat he urged them to come on with their projects. "Washington," he said, "has the money and is waiting for the proper projects to which to allot it."

"It is true that people wanted action. It is true that they were in a mood to accept any painkiller, and damn the normal balance of authority between the executive and legislative authority."

Then began to be heard the saying that Washington had become the country's Wall Street, which was literally true. Anyone wanting credit for any purpose went no longer to Wall Street but to Washington. The transfer of the financial capital of the nation to Washington, the president said, would be remembered, as "one of the two important happenings of my Administration."

What was the source of the money? Partly it was imaginary money, from inflation. Largely it was the taxpayer's money. If the government lost it the taxpayer would have to find it again. And some of it, as the sequel revealed, was going to be confiscated money. By this time the New Deal had got control of the public purse.

Ellen Brown is a far-left statist. She loves the RFC and Fannie Mae. Most of all, she loves fiat money that the government will print up as legal tender. "Legal tender" means that no one inside the United States can legally refuse to accept the government's money. (Technically, this refers only to physical money, not checks.)

For a detailed critique of Ellen Brown's economics, go here:

http://www.garynorth.com/public/department141.cfm


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