Article — From the January 1933 issue

Inside the R.F.C.

An adventure in secrecy

The Congress which now presides over the dying months of President Hoover’s administration will, let us hope, bring to an end that fatuous adventure in secrecy which has stained the record of the Reconstruction Finance Corporation. In the very act of its birth the R.F.C. was stricken dumb by the President. Thereafter for five months it passed round hundreds of millions of dollars of public money to banks and railroads without affording either to the public, or even to Congress itself, a grain of information about the identity of the objects of its bounty.

After these five months–in July–when Congress supplied it with additional billions, the directors were ordered to make to the House of Representatives monthly reports of the sums laid out and the persons or corporations receiving them. Through a mere misadventure in framing this publicity clause, the loans made by the corporation in those first five months were omitted. For this reason we must now divide the life of the R.F.C. into two episodes. The first, covering the period from February to June, was marked by the most complete secrecy; in the second, from July to date, in obedience to Congress, the directors have been compelled to reveal the destination of their funds.


Here I shall deal with that first secrecy. In that time something more than a billion dollars was authorized in loans. Of this sum, nearly 80 per cent ($853,496,289) was lent to bank and railroad corporations. The railroad loans we have been able to guess at because of the preliminary approval required from the Interstate Commerce Commission, whose proceedings are public. But the bank loans–$642,000,000 of them–have never been revealed to this day.

These vast sums were laid out by a group of directors drawn from those business groups whose performances during the pre-crash years have rendered them objects of suspicion to the American people. The immense sums they dispensed were given to borrowers, many of whom, to put it mildly, have forfeited, justly or unjustly, the confidence of the people. These circumstances alone cast a sinister shadow over the policy of secrecy pursued. But the case is something worse than this. The Administration did not stop at mere concealment, but led the public to the acceptance of utterly false impressions.

Here I propose to reveal some of these hitherto unreported loans–enough, at least, to justify Congress in tearing away the screen altogether and bringing to light this whole story.

Before lifting a corner of the curtain let me insert a word about this dangerous notion that government can be safely conducted in secrecy. There is a school of politicians–in close communion with their business allies–who hold to what is sometimes called the idiot theory of government, because of certain expressions which the President himself has let fall. There is a belief that the citizens are stupid; that the less they know the better off they will be; that knowledge in their immature minds will frequently produce economic disorder, and that they will be better served if they will entrust their affairs to the strong and able men set over them by Providence and a well-oiled election machine. The theory ignores a very old truth: that if there are foolish citizens there are also selfish rulers; that the poor judgment of the masses is to be trusted hardly less than the bad ethics of their leaders, and that, in any case, those who supply the funds for governments and the blood for wars have a right to know what is being done with their money and their lives.

For a century this country (and the world) has been learning the solemn lesson that it has nothing to fear so much as the public servant who is unwilling to report to society what he is doing with its funds. In America, at least, we have been warring upon secret diplomacy, secret campaign funds, secret corporation activities, secret utility and railroad managements.

The R.F.C. episode is the perfect example of the policy of secrecy. The prologue to the R.F.C. was the National Credit Corporation. It was proposed at a White House conference October 6, 1931. Thirty-two leaders of all groups were summoned. The topic of the conference was kept a secret, even from the conferees. They were not permitted to think in advance of what they were to discuss. The President was warned against this course but persisted in it. The corporation formed as a result–a private one composed of bankers–functioned in the most absolute secrecy. Two months later the R.F.C. was brought forward to supplant it. Democratic and Republican leaders alike sought to learn how much funds the Credit Corporation had raised, what loans it had made, what it had accomplished. The facts about it have never become known to this day.

When the Reconstruction Finance Corporation, really suggested originally by Eugene Meyer, but quietly adopted by the President, was proposed, various congressional leaders demanded a system of regular reports from the new corporation. The President defeated that proposal. Publicity would react unfavorably and perhaps disastrously on banks if it were known they sought help from the government, he declared. But why should railroad loans be kept secret? As a matter of fact, Senator Couzens insisted that no railroad loans be made until first approved by the Interstate Commerce Commission. This provision alone saved the rail loans from being swathed in the same concealment as the bank loans. It was apparently overlooked at the time that Interstate Commerce Commission proceedings are always reported. As it is, we know the loans approved by the Interstate Commerce Commission, but the R.F.C. has never revealed what it has done about them.

Let this important and significant fact be noted–that in the first period of secrecy loans were made in immense millions to many big banks. After July 1st, when secrecy became no longer possible, these big bank loans ceased.

When the R.F.C. was proposed, many critics feared it was a scheme to aid certain types of big banks. Rightly or wrongly, this apprehension was based on the belief that many big bankers had been guilty of a serious betrayal of their trusts; that sound banking practices had been thrown to the winds; that the resources of the banks had been made available for speculative enterprises through new and vicious forms of banking organization. There was a feeling that the government ought not to use the funds of the people to protect and perpetuate these dubious kinds of banks. The President was aware of this feeling. When he signed the Reconstruction Finance Corporation bill he issued a statement in which appeared these words:

It (the R.F.C.) is not created for the aid of big industries and big banks. Such institutions are amply able to take care of themselves. It is created for the support of the smaller banks and financial institutions and, through rendering their resources liquid, to give renewed support to business, industry and agriculture.

When the show got under way and criticism became audible, expressing fear that the big banks were getting the money, the President and the R.F.C. officers issued numerous statements that almost all of the loans were going to small banks. Publicity was cleverly employed. The President gave out a telegram he had received from the Bank of Abbeyville in Louisiana praising the R.F.C. for saving that little bank. Mr. Eugene Meyer told a critical Senate Committee that 92 per cent of all loans had gone to cities under 10,000 population. In these statements the emphasis was put on the number of banks helped, not on the amount of money lent.

For instance, three weeks after the R.F.C. started to function, the Comptroller of the Currency declared that $24,000,000 had been lent to banks “scattered all over the country.” The number of loans and the banks were indeed scattered. But the money was not. Twenty-one million out of the twenty-four million had gone to just two banks.

Two weeks later the White House issued a statement that the R.F.C. had lent $61,000,000 to financial institutions, “including 255 banks, mostly small Country banks.” But of that $61,000,000 over $41,000,000 had gone to just three banks.

On the very day when the President gave out the telegram acknowledging the salvation of the little Abbeyville bank, the R.F.C. made an unmentioned loan of $25,000,000 to one big city bank.

In April Congress became restless and curious. When the R.F.C. lent money to a railroad to pay a note to J. P. Morgan and Company, there was a threat of investigation. Once again the President produced the inevitable statement. He said:

The banks and trust companies receiving the loans totalling $116,000,000 are located in forty-five States. The great majority of these loans are to smaller communities. Less than $3,500,000 has been authorized in cities of over a million population; more than $116,000,000 has been authorized in towns under 600,000.

At that time over half the money lent had been lent to just three big banks. The statement, moreover, was so phrased as to impose on the casualness of the ordinary reader. You can call a hundred-million-dollar bank in a city of 500,000 a little bank in a little city, but it will still be a big bank in a big city. Minneapolis, Milwaukee, New Orleans are big cities, though they are under 600,000. The climax was reached when at the end of July the corporation announced that it had helped 3,600 banks and that only a little over 4 per cent of them were in cities of over 200,000 population.

Can anyone doubt that the effect of these statements was to conceal the facts and to create the impression that no big banks were being aided; that, as the President said, “they were able to take care of themselves”? If it was proper to aid them, why not say so?

Here is what actually happened. The R.F.C., in those five months, authorized $642,000,000 in loans to 8,600 banks. But $261,000,000 of this sum, or over 40 per cent, went to banks in just seven large cities.

Chicago alone got $109,000,000, or 17 per cent of all loans. San. Francisco got $65,000,000, or over 10 per cent of the whole amount lent.

Cleveland got $27,000,000,lent to three banks.

The President, perhaps, would call Akron, Ohio, a little town. It has 255,000 people and a big bank. One bank in Akron got loans aggregating $18,000,000.

The loans referred to here were in just seven large cities. There were more than 230 other loans to big and little banks in cities of over half a million population which consumed more than half of all the funds laid out.

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(1882-1964), who wrote for The New Republic, Collier’s Weekly, and other magazines as well as for Harper’s, was one of the leading political commentators of his era.

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