Can We Have a New Deal Without the New Dealers?

If you prefer irony to panic, you might consider the peculiar spectacle of the current administration, a bitter opponent of the New Deal, deploying the full force of the New Deal's legacy to stave off the financial crisis. We've been bailing like it's 1933, with the Exchange Stabilization Fund joining the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the Federal Reserve's Open Market Committee in an effort to stop credit from vanishing. And now Congress has provided an emergency-relief program of the kind that made the New Deal work. But can New Deal programs succeed without New Dealers running them? Judging by the last time Americans tried it, during Herbert Hoover's last year of office, the answer is, sadly, no.

We remember Hoover as talking constantly about the imminent return of prosperity -- which, in his view, was a mischievous scamp who always happened to be just around the corner from America and who might be lured back with, say, a cut in the capital-gains tax. But Hoover was far more than a mere happy-talker: He also managed to spend enormous sums of money trying to rescue banks without halting, let alone reversing, the nation's slide into financial disaster. He accomplished this feat because early in 1932 Congress voted to help America's ailing financial sector, creating an agency called the Reconstruction Finance Corporation (RFC) with $500 million in capital and an authorization to borrow $1.5 billion more.

This move represented an unprecedented expansion of federal authority, prompted by an unprecedented banking crisis. In 1931, around 10 percent of the nation's banks suspended operations, taking with them about $1.4 billion in deposits. The officers of the Federal Reserve System did not stop this cascade of failures, believing them regrettable but not the Fed's business. So Congress worked with Hoover to create the RFC, to do what the central bankers would not.

On the face of it, there is every reason to regard the RFC as a New Deal measure created before Franklin Roosevelt's presidency and without his assistance. It put the resources of the federal government to work saving capitalism. Indeed, under Roosevelt the RFC did play an important role in saving the American financial system. But under Hoover it did not, as became clear by the summer of 1932. In its first six months of operation, the RFC lent more than $800 million to banks and other credit-granting institutions. Yet the financial crisis persisted: Banks still held their reserves and lent money unwillingly, and public confidence remained shaky and could easily spark bank runs.

The RFC's failure under Hoover and success under Roosevelt is due largely to Hoover's unwillingness to launch a New Deal even when Congress might well have presented him the means. At first, the RFC only lent money, leaving distressed banks with further obligations. Had it bought stock, the RFC would instead have put the banks a bit farther from disaster. But even after this problem became clear, Hoover did not want the RFC to buy bank stock -- that was socialism. Only with the Emergency Banking Act of 1933, suggested to Congress by Roosevelt and passed within hours, could the RFC buy bank equity. Over the next year, the RFC bought more than a billion dollars of bank stock -- an amount equal to around a third of the capital invested in U.S. banks.

But even before the RFC put the U.S. government's money behind the banks, Roosevelt restored public confidence by certifying the trustworthiness of American financiers by closing, auditing, and then reopening the great majority of the nation's banks -- attracting hundreds of millions of deposits back into the system. As with all measures that exerted new federal authority, Hoover balked at taking this step. But even had he been willing to do it, it's not certain that the public would have trusted him.

Given great power, Hoover failed to show great responsibility, using federal funds for people who seemed to be his friends and cronies, rather than for the public good. This habit appeared most evident in June of 1932, when RFC head Charles Dawes resigned to take over the Central Republic Bank and Trust of Chicago, and shortly afterward announced that he would receive from RFC a loan of $90 million.

Congressman Fiorello La Guardia said the obvious thing loudly and plainly: "He resigned with the idea of borrowing the money." Even if it were not so, it did not look good; President Hoover took a personal interest in the bailout, telling officials, "Save that bank!" Dawes then bargained RFC up from its initial offer to a bigger loan.

With such episodes in the headlines, it would have been hard for Hoover to claim to stand for ordinary Americans, rather than for the rich.

At the same time, La Guardia went on to note that loans to bankers, whatever their merits, were "not going to help the unemployed and hungry people of the country." As if to emphasize this point, the city of Chicago had asked at almost the same time for a $70 million loan from the RFC, and Hoover refused it. This selective use of the agency led Roosevelt to call for "plans that build from the bottom up and not from the top down," invoking the ordinary, "forgotten man." During his presidency, Roosevelt used RFC money for the Home Owners' Loan Corporation, the Farm Credit Administration, the Rural Electrification Administration, and the Public Works Administration, among other agencies, all of them providing ordinary Americans the assistance Hoover denied them.

Roosevelt had the public's trust and used the RFC effectively in meeting the banking crisis, whereas Hoover did not and would not. In short, it wasn't enough to have New Deal power; the president needed to have New Deal ideas and the people's trust in the New Deal.

Now Congress has backed a bailout bigger, in relative terms, than the RFC. But we have no evidence that the administration will do any better than Hoover. The initial White House proposal for purchasing distressed assets may seem slightly better than lending based on distressed assets -- but only slightly; the proponents of this plan never made a persuasive case that it will loosen credit. And the original plan's gratuitous aversion to oversight, combined with this White House's evident coziness with titans of finance and industry, gives little assurance we will not see inside dealing like with the Dawes loan. Improved as it now is, the plan still has plenty of faults: It’s unclear that it will lead to adequate government ownership of banks or that money spent will get directly to working Americans. The efficacy of our rescue depends considerably on whether the next president thinks less like Hoover and more like Roosevelt.

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