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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.


On June 7, 1982, Charles G. Dawes announced that his work as head of the R.F.C. was finished. His letter of resignation was a masterpiece. The budget was balanced, the country moves toward recovery, he observed. He desired to reenter the banking business in Chicago. “It has been a privilege,” he added, “to participate in the earlier stages of the organization of the corporation and its work.” But Mr. Dawes was now about to do some real participating. Less than three weeks later the R.F.C. authorized a loan to his bank of $90,000,000. The President has recently revealed that Dawes resigned not because his work was finished, but in order to look after his bank. Other stories have it that Dawes asked for no money from the R.F.C., but that the request came from other bankers in Chicago. As nearly as I can make out, that is true. But the size of the loan was, nevertheless, remarkable. It was given as $80,000,000 in reports which leaked out at the time. How much Dawes actually got I do not know. But the loan authorized was $90,000,000, which covered almost the entire deposits of the bank, which were only $95,000,000.

Certainly no citizen could have guessed that such vast public sums were made available to just two banks, from the President’s pronouncements about helping little banks and not big ones.

The President has defended this loan on the ground that the fate of 725 country banks were at stake and, through them, the fate of 21,000 other banks. The defense, however, fails to give an adequate answer to a pertinent question. What, may we not ask, was Dawes doing on the Reconstruction Finance Corporation?

Some parts of the Dawes loan story have leaked into the newspapers. Here are a few stories that have not leaked out. On February 15th, Mr. Amadeo Giannini won a bitter battle in Wilmington to regain from Elisha Walker his old control of that famous Delaware corporation, the Transamerica Corporation. The Transamerica Corporation is one of those holding companies which controlled a vast tangle of banks, insurance companies, realty concerns, utility enterprises, security and investment companies, and what not. Its chief prize was the Bank of America in California. The story of Giannini’s victory was of course in all the newspapers. What was not in the newspapers, however, was the fact that on that very day the R.F.C. authorized the lending to the Bank of America of $15,000,000. Nor has the public ever been told that before the Reconstruction Finance Corporation got through ladling out money to this bank it authorized a series of loans–one a month–aggregating $65,000,000.

These two loans authorized to Dawes and Giannini totalled $155,000,000. Certainly no citizen could have guessed that such vast public sums were made available to just two banks, from the President’s pronouncements about helping little banks and not big ones. But there is a good deal more. A loan of $14,000,000 was authorized to the Union Trust Company in Cleveland. Interest in this loan rises when we are told that the Chairman of the Board of this bank, up to June 16th of this year, was Mr. Joseph R. Nutt, treasurer of the Republican National Committee.

Much curious comment attended the naming of the Honorable Atlee Pomerene as head of the R.F.C. to succeed General Charles Ninety-Million Dawes. The Honorable Atlee is a noble Roman of true senatorial exterior, a measure of whose statesmanship may be deduced from his pronouncement after taking the reins which had fallen from the hands of Dawes. If I were a Mussolini in this country, he thundered, I would compel every merchant in the land to increase his purchases now by thirty-three per cent. Why the Democrat Pomerene was chosen, however, was never wholly made clear. But he was, in truth, the ideal Democrat for the job. A loan of $12,272,000 was authorized to the Guardian Trust Company of Cleveland, the Honorable Atlee’s home town. And Atlee Pomerene was a director of that bank.

There were others. In Baltimore the Baltimore Trust Company, of which that Republican stalwart, Senator Phillips L. Goldsborough, was vice-chairman, was authorized to receive $7,402,345 in April.

In Detroit the Union Guardian Trust Company of which Mr. Roy D. Chapin, now Secretary of Commerce, was a director, was authorized to receive a loan of $12,983,000. In Akron–one of Mr. Hoover’s “little” towns–the First Central Trust Company, of which Mr. Harry Williams was chairman and Mr. Harvey S. Firestone, Jr., a director, was authorized to receive $19,000,000.

Among insurance companies, very little help was needed or given to life insurance companies. A large loan, however, was made to a casualty insurance company, one which signs bonds, etc. It was authorized to receive $8,880,000, and among its directors are such worthy objects of government aid as Percy Rockefeller, Elisha Walker, Sidney Z. Mitchell, Charles Hayden, W. A. Harriman, Robert Goelet,

George B. Cortelyou. It is worth observing that almost at the moment this company was seeking millions from the government, one of its directors at least was answering to a Senate Committee for his bear operations in Wall Street.

One large fire insurance company got a cut of $7,000,000–the Globe and Rutgers Fire Insurance Company. The head of this company, E. C. Jameson, will be remembered as the big-hearted patriot who handed out $68,000 to Bishop Cannon in 1928 to carry Virginia for Hoover and the Lord.

Is it not worth a passing thought that almost all of the big banks which had to seek help were under the dominion of those political financiers who clustered round the throne and who coyly admit that they are the architects of our prosperity?


There is a reason of commanding importance why these loans should have been made public. We have a right to know something of our economic situation. We are going to have to deal with it. We cannot deal with it if the facts are deliberately concealed from us. One of our most perplexing problems is that of our banks. Mr. Mills has told us that the shock of England going off the gold standard closed a thousand banks in this country in three months. He has not told us why that shock, which knocked a thousand of our banks into a cocked hat, failed to close one in England herself. There must be some difference in the banks. What is it? The President and his Comptroller of the Currency have preached that the trouble had been in the small, weak unit banks. They have urged branch banking. The Comptroller has regaled us with endless statistics of the failures of small banks.

But what of the weaknesses among the big banks? Are these to be systematically concealed? Branch banking is, I am disposed to think, sound enough. But there is another kind of banking, called group banking, which might be called holding-company banking. Branch banking with holding-company control, such as we have already witnessed in our utility business, would be a curse. There is also the vicious practice of bank affiliates. How many of these big banks which have had to yell for help were holding-company controlled or were using the dangerous investment and security affiliate practice? Almost all of them. Why did they need this money? What weakened their structure? What had their holding-company control or their security affiliates to do with it? These are questions which Congress, which must deal with our disgraceful banking condition, ought to ask. How disgraceful that banking situation is may be gleaned from the amazing boast of the Hon. Atlee Pomerene to the effect that during the first six months of the R.F.C. only 600 banks had failed. It might be added that during the ten months of the activities of the R.F.C. some 1,100 have failed.


The big New York banks and investment bankers are noticeably absent from this list of beneficiaries. But they were not forgotten. Like the overcoat in the salesman’s expense account, they are there but you cannot see them. They are to be found in the loans made to the railroads. These loans to railroads were made on the theory that railroad securities were held in great amounts by insurance companies and savings banks, and that if the roads defaulted in the interest or maturity payments on their bonds, receiverships would be inevitable and the loss would fall on these insurance policy holders and savings depositors. A look at what happened, however, reveals some amazing performances.

Up to September 30, the R.F.C. loaned to the carriers $264,866,988. I have not been able to trace the purposes of all these loans. But I have been able to examine 70 per cent of them. What follows, therefore, applies not to all the railroad loans, but to $187,000,000 of them.

Of this amount $36,451,000 was lent for improvements, such as the $27,000,000 to the Pennsylvania Railroad for electrification. These are defended on the ground of making work and may be passed over. This leaves–in round numbers–loans amounting to $150,000,000 to railroads to enable them to pay debts.

In March a loan of $5,750,000 to the Missouri-Pacific to pay a note due J. P. Morgan & Company came to light and produced a mild sensation. The Missouri-Pacific is one of the numerous possessions of the Van Sweringens. It is controlled through a series of holding companies resembling the Insull structure–a device which has been roundly condemned by the Interstate Commerce Commission. As a matter of fact, the Morgan firm, as bankers of the Van Sweringens, are in the closest communion with the Cleveland promoters. The use of public money to enable the Van Sweringen road to pay money due the Morgans seemed to have little to do with “overcoming the crisis,” as the President loves to call his program. But this was not the only loan to railroads to enable them to pay off investment bankers and large New York institutions. The Van Sweringens themselves got another $6,000,000 to pay off bank loans on another one of their roads–the Nickel Plate. This was in February, and they were back again in September for another $5,000,000 for the same purpose. The Baltimore and Ohio got at one time $9,000,000, to be used to pay $8,000,000 to Kuhn, Loeb (bankers), $500,000 to the Chase National (one of whose directors sat on the R.F.C.), $250,000 to the Central Hanover Bank, and $250,000 to the First National Bank, all in New York.

There was plenty of this. In fact I have accounted for nineteen such advances amounting to $44,000,000 made to railroads to pay off bank loans.

Congress ought to explore the character of the pressure which was brought to bear upon the Interstate Commerce Commission to approve these loans. That most of them were made reluctantly is beyond question. That the President constantly interfered to put pressure upon both the commission and the R.F.C. itself there can be no doubt. His announcement of Dawes’ selection as President of the R.F.C. before the members–charged with electing their president–were named; his open boast in the last days of the campaign of the huge loans made for California projects–all call for examination in detail. In the case of these bank loans, Eugene Meyer, representing the President, went to the Commission and pressed the loans, declaring they were part of the recovery plan, to put more money into the banks, so that after a while they would have so much “it would burn a hole in their pockets” and they would begin to lend it out. The futility of this plan must now be quite apparent to everyone.

Another $24,000,000 was lent to railroads for a strange miscellaneous collection of purposes–to pay bills, meet pay rolls, pay rent on real estate, complete payments on real estate, supply cash for the drawer and, worst of all, to enable the roads to pay rent on both real estate and on leased roads. The New York Central, for instance, got more than $5,000,000 for this purpose. One corporation owning a railroad sometimes leases it out to another railroad corporation. The latter pays rent for the use of the road. The rent is usually a large enough smn to pay the leasing corporation a profit or dividend on its investment. When the R.F.C. lent money to one railroad to pay rentals to another railroad, it was in effect using public funds to pay dividends to railroad stockholders. A more indefensible action could hardly be imagined.

Out of the whole sum we have traced, therefore, only $69,000,000 (in round numbers) was lent to railroads to pay interest or maturities on bonds held by insurance companies and savings banks. Certainly these loans could exercise no influence on the duration of the depression except to prolong it. A depression is a phenomenon which appears when the income of the population, always insufficient to buy what is produced, becomes so heavily saddled with debt charges that its use as purchasing power is mortally reduced. When this happens two things must follow. First, prices must come down to bring goods closer to the size of the available income. Second, income itself must be freed for purchasing by the extinguishment of excessive debts.

Whether we like it or not, this is what takes place. Any attempt to hold up prices or to save the weaker debts necessarily prolongs the depression. One thing alone can help to check the crumbling of the poorer debts. That is to increase income. The government can do but one thing toward that end. It can create income by launching extensive public works. Whether it should do this or not is a question about which men are divided. I take no position on that here. But if this cure is discarded, then the government must confess itself impotent. Certainly it can do nothing by merely shifting debts around.

Let us apply this to the railroads. Most of the actual capital invested in the roads is in the form of bonds or preferred stocks. Fifty-four per cent of their capital is in bonds as against only 16 per cent in the case of industrial corporations. This means that in good times or bad, whether there are profits or not, the railroads must continue to pay profits on 54 per cent of their capital. The purchasing power of the railroads is hopelessly paralyzed by debt. This situation must be corrected. And certainly in the case of many of these roads there is no method of correction open save through receiverships. The quicker the correction comes, the quicker the regeneration of the road will come. This the R.F.C. has wholly ignored as part of its depression surgery. Many roads are hopelessly saddled with impossible, rigid bond loads. Instead of permitting the correction of this fatal flaw to take its course, the R.F.C. has actually added to the bond load. The roads will come out of the depression in the matter of debt worse than they went in. In any case, to use public funds, so desperately needed elsewhere, to pay profits to investors is an indefensible exertion of government.

Would it not have been more intelligent to permit at least some of the roads to go into receiverships and submit to the inevitable curative processes? Some are heading that way anyhow. Two of those aided were already in receivers’ hands. And another–the Frisco–since its “salvation” has gone that route. If the government is going to start paying interest on bonds and the bonds themselves as they mature, there will be no end to it. The Baltimore and Ohio got $32,000,000 in April and was back again in August for another $31,625,000. The Nickel Plate had to borrow $9,300,000 in February. It showed up for another $6,000,000 in September. The Chicago and Northwestern got $1,910,000 in February, nearly $5,000,000 in April, and was around for another $12,000,000 later.

As to saving life insurance companies there is good reason to believe that this is one of those convenient reasons which men know so well how to invent. No evidence has been offered to show that these loans would save any insurance policy holders from loss. Take a single case. The Pere Marquette got $3,000,000 to pay equipment trust certificates of the Lake Erie and Detroit. There is no evidence that the whole Marquette system would have gone into receivership if this loan of the Lake Erie had not been met. But if it had and all of the Marquette bonds had declined, what would have been the loss to life insurance companies? This road had outstanding $77,000,000 in bonds. Of this, $20,000,000 was in the hands of life insurance companies. But the value of these bonds at the time of the “rescue” was about $7,500,000. A receivership would not have reduced their value much more. But suppose it had wiped out these bonds completely. These securities were distributed among about fifty companies. Just nine of these companies have reserves of over nine billion dollars. A loss of the entire investment would have meant a loss of less than one-fiftieth of one per cent based on existing market value.

In another case a loan of over a million dollars was made to one of Mr. Insull’s numerous playthings–the Chicago, North Shore and Milwaukee R.R. This road had outstanding $2,000,000 in bonded indebtedness. But only $732,000 of this was held by insurance companies, and 54 per cent of this was owned by a company in Canada.

The simple truth is that the credit of the railroad companies’has been ruthlessly exploited during these last ten years to provide funds for the acquisition of stocks in other roads at exorbitant prices in the mad scramble of a few promoters to get control of various systems. Now these holdings, and the control over their little empires of these clever gentlemen, are threatened. And the credit of the government of the United States is being mobilized to save them. Out of $264,000,000 loaned to railroads by the R.F.C., $156,000,000 has been advanced to the roads controlled by three groups–the Morgans, the Van Sweringens, and the Pennsylvania Railroad. Some explanation will certainly have to be made sooner or later of this amazing performance.

(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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February 1939

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