II. EUGENE MEYER—PROFESSIONAL CAREER

Eugene Meyer amassed a sizable fortune in fifteen years as an investment banker/venture capitalist, and would accumulate much more as later investments reached fruition. Meyer’s career began with a speculative gamble. Sensing that a McKinley victory in the 1900 election would spark a stock market rally, he used his financial capital of $5000 to purchase railroad stock options. By January 1901, his holdings were worth $50,000, and he used the entire sum to purchase a seat on the New York stock exchange, beginning his own investment banking firm (Meyer Reference Meyer1974, Box 179).^{Footnote 2}

Almost immediately, Meyer learned a strategy that would often profit him handsomely. In a 1901 panic involving Northern Pacific Railroad stock, he began buying, for both himself and his customers, during the selling frenzy. Once the selling ended, Meyer and his clients were considerably enriched.^{Footnote 3} Meyer also anticipated the 1907 panic, liquidating assets early and buying into the worst of the decline, again reaping considerable profit.

In 1904, while on vacation, Meyer reflected on his investing successes and failures, and how the influence of his studies in Germany altered his investing strategy. While in Berlin, Meyer had taken a course in “The Theory and Techniques of Statistics.” He decided to develop a new approach to investing by employing experts and analysts to conduct statistical and scientific analysis to relate the prospects of individual companies to economic trends, and he was the first on Wall Street to practice this now common method of security analysis. In 1909, Meyer’s firm produced a famous report on the economic prospects of U.S. Steel. Impressed by the report, J. P. Morgan warned a partner to “watch out for that fellow Meyer, because if you don’t he’ll end up having all the money on Wall Street” (Pusey Reference Pusey1974, p. 72). Meyer was also known for his system of estimating freight-car loadings to predict economic trends.

Meyer’s financial strategy was to invest in new businesses essential to the growth of the economy. Feeling that the use of electric power and light would grow rapidly, but reluctant to invest in electric utilities, he focused on copper mining. His successes had by 1915 resulted in a personal fortune estimated to be between $40 and $60 million (Graham Reference Graham1997, p. 24).^{Footnote 4}

Meyer realized that World War I would curtail shipment of German dyes to the United States, and he provided financing to a German chemist to develop a dye manufacturing company. In 1916, this initiative led to the formation of the National Aniline and Chemical Company, and in 1921, Meyer negotiated a merger of this company with four other chemical companies to form Allied Chemical and Dye Corporation. By 1931, his stock in Allied Chemical added an additional $43 million to his net worth, and the continuous dividends during the Depression covered his losses during his early years as publisher of the Washington Post (Graham Reference Graham1997, p. 24).

Early in his career, he was interested in railroads, frequently investing in railroad stocks. But, by 1910, Meyer felt that the prospects for the railroads were declining, while those of automobiles were bright. This led to an investment in Maxwell Motors that, while ultimately profitable, proved frustrating and placed him under rare financial pressure. But he also underwrote and invested heavily in the first stock offerings of an auto-body company. Had he accepted stock rather than cash, he would have become one of General Motors’s largest shareholders when GM purchased the Fisher Body Company that Meyer helped finance (Graham Reference Graham1997, p. 20).

Anxious to serve his country during the First World War, Meyer closed his investment banking business in 1917. The next phase of his life was devoted to public service, primarily through the War Finance Corporation, Farm Loan Commission, Federal Reserve Board, and Reconstruction Finance Corporation.

Meyer resigned from the Federal Reserve in 1933 and embarked on a new career in publishing, secretly purchasing the Washington Post at a bankruptcy auction. Later aided by his son-in-law and daughter, Philip and Katharine Graham, Meyer and the Grahams reversed the fortunes of the once-failing paper. Meyer returned to government service again during World War II as a member of the National Defense Mediation Board. After the war, when President Truman experienced difficulty filling a new position, Meyer agreed to serve as the organizer and first president of the International Bank for Reconstruction and Development, although he resigned after six months, tiring, at age seventy, of a power struggle within the bank (Pusey Reference Pusey1974, p. 353).

III. WILLIAM GRAHAM SUMNER AND YALE

After a year of study at the University of California, Meyer enrolled in Yale in 1893, and, by accelerating his studies, graduated Phi Beta Kappa in 1895. At Yale, Meyer studied social science during his final year with William Graham Sumner.

Joseph Dorfman (Reference Dorfman1949) identifies Sumner as the great spokesman of the New England School of laissez-faire. Richard Hofstadter (1959, p. 51) characterizes Sumner as “The most vigorous and influential social Darwinist in America,” and states that he had the widest following of any faculty member at Yale.

Sumner’s economics synthesized classical economics, the Protestant ethic, and Darwinian natural selection. Richard Hofstadter notes that Sumner’s writings have a religious fervor, not surprisingly, as Sumner was a minister prior to becoming a professor. Sumner believed that men should accept the natural law of competition: “Competition is a law of nature which can no more be done away with than gravitation” (quoted in Hofstadter Reference Hofstadter1959, p. 66).

Dominick Armentano (Reference Armentano1967) examines Sumner’s economics. He finds that Sumner’s influences include David Ricardo, Thomas Robert Malthus, and Charles Darwin. His model was based on perfect competition and assumed full employment. The proper activities of government include upholding law and order, the administration of justice, the protection of private property, and the preservation of civil liberty. Beyond these, laissez-faire was to be the norm. Sumner said that there “are not many ways that governmental interference in economic matters can bring about the desired beneficial consequences” (quoted in Armentano Reference Armentano1967, p. 133).

Bruce Curtis recounts that for Sumner, Adam Smith’s “Invisible Hand” became social Darwinism. Sumner “replaced God with nature as man’s disciplinarian and judge when he transgressed natural law” (Curtis Reference Curtis1981, p. 76).

Both Armentano and Curtis note that Sumner was not influential in economics beyond his own time. Curtis (Reference Curtis1964) argues that in economics, Sumner was a defender, not a questioner. Sumner did not contribute to the advance of economic theory. Rather, he accepted the existing classical economic theory, and defended its implications.

Perhaps Sumner’s most noted contribution to economics is his “Forgotten Man”: “A and B decide what C shall do for D.… I call C the Forgotten Man, because I have never seen that any notice was taken of him in any of the discussions” (Sumner Reference Sumner1883, p. 23).

Sumner’s Forgotten Man is the middle-class worker going about his life, working at his job, raising his family, and enjoying the fruits of his labor. However, the state may divert his “labor and self-denial … from his maintenance” (Sumner Reference Sumner1883, p. 15) to “The man who has done nothing to raise himself above poverty…” (Sumner Reference Sumner1883, p. 23). To Sumner, this was the ultimate evil. The wealthy were the product of natural selection and helping the poor interfered with laissez-faire and thus was wrong.

Sumner objected to government intervention because the result was the worst of all monopolies, the purpose of which was the exploitation of others (Sumner Reference Sumner, Keller and Davie.1924, p. 227). He believed that the German historical school was attracting a generation of American economists away from the truth (Bannister Reference Bannister1973).^{Footnote 5} The German historical school favored an extensive welfare state that required a sacrifice of personal liberty (Sumner Reference Sumner, Keller and Davie.1924, p. 268).

During his time at Yale, Sumner’s influence on Meyer was profound:

Meyer likely found Sumner so compelling because he had learned the same ideas from his father, whom young Meyer greatly admired and respected: “Sumner seemed to lay out a broad philosophical basis for what young Meyer heard from his own father about the virtues of sound money, free trade, the evils of state interference, and the like” (Meyer Reference Meyer1974, Box 179).

The essays Meyer wrote at Yale demonstrated Sumner’s influence. In one such essay, Meyer wrote about the folly of a recent union strike. Another dealt with regional disputes over tariffs and the threat these disputes posed for national unity. His senior thesis for his advanced economics class, taught by a Professor Schwab, attacked the silver inflationists and defended sound money (Meyer Reference Meyer1974, Box 179).^{Footnote 6}

IV. ADOLPH WAGNER AND THE GERMAN INFLUENCE IN AMERICA

German academe and scholarship exerted tremendous influence in nineteenth-century America. Young Americans would frequently complete their education with a post-graduate tour and period of study in Europe, and Germany was the most respected destination. Before 1870, Americans were attracted to Germany to study science and medicine; afterward, they were attracted to study social science and liberal arts (Herbst Reference Herbst1965, pp. 6–8).

Various scholars (Coats Reference Coates1985; Letiche Reference Letiche1955; and Spengler Reference Spengler1976) date the development of the professional science of economics in America to the last decades of the nineteenth century. Previously, economics was taught as part of a philosophy or social science class.

A significant step in the development of American economics was the founding of the American Economic Association (AEA) in 1885. The association was organized by American economists, including Richard Ely and General Francis Walker, who had studied in Germany and had been influenced by the teachings of the German Historical School of economics.

The new association was modeled after the Historical School’s Verein für Sozialpolitik (Union for Social Politics). The Verein was founded by the leader of the younger historical school, Gustov Schmoller.^{Footnote 7} The Verein was explicitly political, promoting a welfare state, or “social market economy,” as it is known in Germany (Senn Reference Senn and Backhaus1997). These conservative socialists were known as Kathedersozialisten (Professorial Socialists or Socialists of the Chair).

Dorfman (Reference Dorfman1955) characterizes the Verein as a revolt against eighteenth-century reasoning based on natural law. Extreme laissez-faire was opposed. Members saw a conflict between self-interest and moral forces, and felt that the working classes had not benefited from industrialization as had the owners of capital.^{Footnote 8}

The founders of the AEA intended that it be the American equivalent of the Verein, promoting a similar progressive agenda (Carlson Reference Carlson1999). Ely said that the new association “must not include men of the Sumner type” (quoted in Dorfman Reference Dorfman1949, p. 206). However, by 1887, the AEA altered its constitution, essentially eliminating its progressive agenda and focusing solely on research in an effort to attract young, classically trained economists as members (Dorfman Reference Dorfman1949).

Dorfman (Reference Dorfman1949) notes that, initially, Harvard and Yale economists did not join the AEA. Thus, Meyer, educated at Yale, learned only that the Historical School agenda was contrary to laissez-faire principles. Meyer’s exposure to German economic ideas came directly, from his study in Germany.

Shorty after his graduation from Yale, Meyer went to Europe, working and studying in Paris, various German cities, and London. In Germany, Meyer first stayed and worked in Frankfurt, living with a German family and studying German (Pusey Reference Pusey1978).^{Footnote 9}

Meyer next accepted a banking position in Berlin. While in Berlin, he took several courses at the University of Berlin. One course had a profound impact on his economic thinking. The course, attended by about 1,000 students, was “Selected Questions in Social Policies,” taught by the German state socialist, Adolph Wagner. What Meyer heard from Wagner was the opposite of the teachings of William Graham Sumner.^{Footnote 10}

Although he was often identified as a member of the German Historical School, Wagner was not strictly a member of the school (Senn Reference Senn and Backhaus1997). While sharing similar views on the role of the state and belonging for a time to the Verein, Wagner was often critical of the Historical School and debated with them over methodology. He rejected the Historical School’s inductive approach, favoring deductive reasoning and the use of statistics. Wagner described himself as a “German State socialist, who is used to government intervention and disposed to favor it” (quoted in Senn Reference Senn and Backhaus1997, p. 58).

Donald Wagner (Reference Wagner1939) describes Wagner as accepting self-interest but rejecting the classical application emphasizing laissez-faire. Wagner combined historical methods and deductive reasoning, and was critical of the Historical School’s rejection of abstract and deductive reasoning.

Benny Carlson (Reference Carlson1999) notes that Wagner sought a middle way between British liberalism’s focus on production and scientific socialism’s focus on distribution. The most important roles of the state were to create public order and national defense. Regulation was necessary to protect the weak from the economically strong. He favored nationalization of certain industries to generate revenue for the redistribution of income. Also, to create a new social economics, attention must be paid to matters of psychology, customs, the legal system, ownership, and freedom. Wagner did worry about the impact of the state on civil liberties that he hoped, as much as possible, to preserve (Backhaus Reference Backhaus and Backhaus2003).

Wagner’s moral reasoning derived from his Christianity (Drechsler Reference Drechsler and Backhaus1997).^{Footnote 11} Wagner explained in his famous “Speech on the Social Question” that economics must ethically address social issues, stressing “the moral and therefore Christian obligations which wealth, education, and social position impose, even in dealing with the social question from the economic standpoint” (quoted in Wagner 1934, p. 489).

While Sumner believed the distribution of income should be derived from natural selection, Wagner did not, and, unlike Sumner, argued that ”the redistribution of national income in favor of the lower classes is a conscious aim of modern social policy” (Wagner Reference Wagner, Musgrave and Peacock1958, p. 9).

Like Sumner, Wagner is perhaps best known for his normative work on the role of the state, that economists “should point out what should be” (quoted in Senn Reference Senn and Backhaus1997, p. 61). Also, both wrote on monetary issues.

Wagner’s lasting scientific contribution is his work in fiscal policy. Specifically, Wagner’s Law predicts an ever-expanding role for the state:

Carlson (Reference Carlson1999) and Senn (Reference Senn and Backhaus1997) attempt to assess Wagner’s influence in the United States. Dorfman (Reference Dorfman1955) does the same for the German Historical School. All find that a primary, likely the most important, channel of influence was through the many Americans who studied in Germany. This was also the channel of German influence on Eugene Meyer, the class he took from Adolph Wagner, as well as reading Wagner’s books.

V. EUGENE MEYER—POLITICAL ECONOMY

Eugene Meyer studied economics under two very influential economists who espoused opposing philosophies. At Yale, Meyer actively engaged Sumner in discussions of his teachings. Meyer’s concern for individual liberty made him receptive to Sumner’s advocacy of competitive markets. As noted above, at the time of his graduation, Meyer felt that what he learned from Sumner was the most significant contribution of his Yale education.

After reading and studying under Wagner, Meyer concluded that Wagner’s views were appropriate for Germany with its inflexible labor market, but that level of government intervention was not yet needed in the United States, but might be needed in the future. But, if that was the case, economic policies were relative, determined by time and place, not based on universal natural laws. So Meyer concluded that economics was a highly pragmatic art rather than a science, as Sumner had taught. “From the force of this idea then, Meyer began to look upon political economy in ways that stood a bit to the side of Sumner’s orthodoxies” (Meyer Reference Meyer1974, Box 179).

As the United States approached entering World War I, Meyer delivered a speech in which he rejected laissez-faire and called for greater cooperation between government and business:^{Footnote 12} “Our policy is still too much under the influence of outworn laissez-faire doctrine. Europe, even prior to the war, had as its policy faire marcher. ^{[Footnote 13]} More than ever before Government and big business need to take council together” (Meyer Reference Meyer1974, Box 78). Thus, Meyer, inspired by his exposure to Wagner’s economic philosophy, arrived at the Progressive Era conclusion that the laissez-faire philosophy was outdated. He believed that “abnormal” conditions often controlled markets, and that men attempted to control and regulate markets for their own benefit (Meyer Reference Meyer1974, Box 180). Meyer was no stranger to market instability. In 1910, while traveling in Asia and Europe with his new wife, Meyer received cables about a copper production and price war that was depressing the value of his investments. Meyer negotiated an “understanding” among the principal producers to cut production, ending the price war. The agreement was unwritten, leaving no evidence of explicit price fixing that would be construed as an antitrust violation (Pusey Reference Pusey1974, pp. 82–84).

Before Meyer entered government service during World War I, he advised Bernard Baruch, who was negotiating the purchase of forty-five million pounds of copper for the armed services. Baruch sought Meyer’s advice regarding a “fair” price, and Meyer recommended a price based on a ten-year average, which the copper producers accepted, even though it was significantly below the prevailing market price. This negotiated agreement earned both men considerable notoriety.

In Washington, Meyer eventually joined Baruch’s Raw Materials Committee of the General Munitions Board, later the War Industries Board. Meyer became director of the non-ferrous metals unit of the Raw Materials Committee.^{Footnote 14} Acting for Baruch, Meyer prevented an army purchase of steel at what Meyer felt was an exorbitant price. Meyer suspected that companies were canceling civilian contracts hoping to sell at higher prices to the government. He advocated the creation of a central purchasing agency to “regulate the whole industrial situation.” In his position at the War Industry Board, Meyer sought to purchase metals at prices that he felt were “fair” (Pusey Reference Pusey1974, pp. 140–148).

Clearly, Meyer believed that sizable price changes resulting from rapidly changing demand or supply could be “unfair.” In such instances, Meyer felt action should be taken to “stabilize” markets. With his background as a very successful investment banker, his solution was the provision of credit or financing until markets returned to a more “normal” condition.

In an address about the WFC, Meyer advocated the federal provision of temporary financing of exports, claiming that the normal channels of export finance had broken down, and thus the WFC should make loans financing exports. In the same speech, he advocated government intervention in the labor market.^{Footnote 15} He argued that waiting for supply and demand to clear the labor market took too long and entailed too much suffering. He argued that “that if you want to get the result quickly, and are unwilling to allow the difficulties and sufferings which exist in connection with unemployment, we must at times act with regard to the social aspects of the problem which the brutal application of the old law of supply and demand does not contemplate” (Meyer Reference Meyer1974, Box 78).

Thus, Meyer had abandoned the laissez-faire philosophy he had learned from Sumner at Yale for what he felt was a more pragmatic, interventionist approach to economic issues. He explained his change of thinking when discussing his proudest accomplishment in government service, the creation of the Reconstruction Finance Corporation:

In sum, while never characterized as such, Meyer was a Republican progressive, in the vein of President Theodore Roosevelt, whom Meyer admired: “I was in fact a very great admirer of Theodore Roosevelt” (Meyer Reference Meyer1961, p. 64). Meyer espoused many of the progressive ideals of the late nineteenth and early twentieth centuries.^{Footnote 16} He rejected laissez-faire and classical liberalism. He embraced measurement and an empirical/scientific approach in all that he did. His emphasis on the importance of “administration” is similar to the progressive embrace of Taylor’s scientific management.^{Footnote 17} And, as described below, he advocated a larger role for central government, contrary to Sumner’s laissez-faire philosophy.

While the progressive movement in his own country undoubtedly influenced Meyer, his time in Germany was also important. Meyer’s French father had instilled in his son an anti-German hostility. But his time in Berlin evoked a change in attitude: “But now that Eugene Jr. was in Berlin, his anti-German prejudices began to ebb … Meyer fell easily into the cadence of a true Berliner. The air over-head—as he first breathed it—seemed so free, so liberal, so progressive” (Meyer Reference Meyer1974, Box 179). His time in Germany had a profound influence on Meyer’s economic philosophy.

VI. THE WAR FINANCE CORPORATION

Scant attention has been paid to the activities of the War Finance Corporation or their significance. Saulnier et al. (1958, p. 192) do note that WFC lending in 1921–22 was a “significant extension of the scope of government activity in the farm credit field.” In actuality, WFC lending was even more significant, as the loans were made directly to banks and other financial institutions that were under pressure due to the agricultural depression. Rescuing the farmers required rescuing the bankers.

The War Finance Corporation (WFC) evolved from the Capital Issues Committee. This committee, formed in January 1918 at the request of the Secretary of the Treasury, was comprised of three members of the Federal Reserve Board. The committee determined whether corporate and municipal borrowings would detract from the war effort, and recommended postponing issuing securities for projects that did not support the war effort. Restricting unessential borrowings would also free resources for the war effort.

Compliance with the committee’s recommendations was voluntary, but Treasury Secretary McAdoo wanted to create a legal basis for this committee and make its recommendations binding. The War Finance Corporation Act, signed April 5, 1918, created the formal authority.

The Act created a new, formal Capital Issues Committee comprised of seven members, three from the Federal Reserve and four unrestricted members. The unrestricted members could be Federal Reserve or government officials or representatives from business. However, contrary to Secretary McAdoo’s desire, the new committee’s recommendations on security issues were not binding. The Act created a legal basis for the committee and expanded its membership, but otherwise made no significant changes in the committee’s authority.

The WFC began operations on May 20, 1918. In addition to making recommendations on private borrowings,^{Footnote 18} the WFC was to provide funding to industries essential to the war effort. The WFC received capital of $500 million from the US Treasury. The legislation authorized the WFC to borrow up to an additional $3 billion through bond issues. The WFC was an off-budget agency, not requiring annual appropriations. The original legislation required the WFC to close six months after the end of the war; however, its existence was extended several times.

Another provision of the Act authorized the WFC to deal in government bonds. The Treasury delegated to the WFC the responsibility to purchase Liberty and subsequently Victory bonds to limit fluctuations in the market price of these bonds, as their prices had fallen sharply after they were issued, resulting in many complaints. The intention of the repurchases was to stabilize prices in the hope that stable prices would facilitate subsequent bond issues without increasing the coupon rate.

The WFC did engage in significant bond purchases. Between its bond issues, the Treasury bridged its financing needs, including WFC bond repurchases, through sales of short-term certificates of indebtedness. The endeavor was profitable due to the significant discount at which the bonds sold during the buy-back period. The WFC purchases, while not returning prices to par, appear to have had some stabilizing impact, as bond prices dropped sharply when the purchases ended.^{Footnote 19}

Figure 1 depicts the yields to maturity on the Third and Fourth Liberty bonds that comprised the majority of WFC purchases, and the coupon rate on Treasury certificates of indebtedness.^{Footnote 20} The higher yields on the war bonds until mid-1920 made the purchases profitable, as well as possibly keeping the yields on subsequent issues lower than they would otherwise have been. Meyer recalls that in 1920, Assistant Treasury Secretary Russell Leffingwell “was finding difficulty in selling ninety-day treasury bills [sic] at six percent” (Meyer Reference Meyer1961, p. 335). It was at this time that the bond purchase program was terminated.

Figure 1. War Bond Yields and Certificate of Indebtedness Rates.

Meyer’s public career began when he volunteered for military service in 1917 at the age of forty-one. Unable to serve as a soldier because he was color-blind, he went to Washington as a dollar-a-year man. Being a staunch Republican, he was not welcomed with open arms by the Wilson administration. Through the assistance of Justice Brandeis, Meyer obtained a position on the Advisory Committee on Finished Goods and eventually worked for his friend Baruch in the War Industry Board.

Subsequently, he was appointed as one of the original directors of the WFC and was put in charge of the bond price-stabilization program. Federal Reserve Board Governor W. P. G. Harding was the first managing director of the WFC, but he rarely attended meetings and relied heavily on Meyer to run the agency. Meyer was elected managing director in January 1919, after Harding’s resignation from the WFC board.

As noted above, Meyer felt that the world war had created an emergency situation for American agriculture, as the normal channels of export finance had broken down. In 1919, Meyer sought and gained Congressional approval for the WFC to make loans to European buyers to help American agricultural exports and American farmers.^{Footnote 21} Federal financial intermediation now was extended beyond the emergency of war to a perceived post-war emergency. However, Treasury Secretary David Houston, a staunch advocate of laissez-faire, decided to suspend WFC activities in May 1920. Meyer resigned, as he was opposed to what he correctly felt were Houston’s deflationary polices, expressing his belief in the benefit of federal intervention: “that the Corporation—if it had continued to function—would have been able to mitigate, to some degree at least, the suddenness and extent of the collapse in commodity markets and prices in the fall of 1920” (Meyer Reference Meyer1923, p. 83).

But, while Meyer had resigned, he had not retired from promoting continued WFC lending. He began a propaganda campaign seeking a revival of the WFC. At the New York Chamber of Commerce, he advocated continued federal provision of credit: “we face an emergency in which private credits will not of their own accord be forthcoming to finance foreign trade. The government alone is in a position to bolster and again set in motion the normal operations of the international credit mechanism” (Meyer Reference Meyer1974, Box 180).

Meyer’s campaign succeeded. After the election, Meyer urged Congress to pass a resolution reviving the WFC’s operations, which it did in January 1921, even overriding President Wilson’s veto. President Harding reappointed Meyer to the WFC board, and he was again elected managing director.

In 1921, Congress passed Meyer’s bill known as the Agricultural Credits Act of 1921. The bill transformed the WFC into a support agency for the distressed agricultural sector. In addition to financing exports, the WFC’s activities expanded to include lending to rural banks and cooperatives. It was this version of the WFC that later was his model for the RFC.

As a result of the 1921 Agricultural Credits Act, much of the WFC’s lending went to banks. The objective of the lending program was to assist banks and co-ops in agricultural regions. The WFC loans provided banks with liquidity and the ability to repay loans to their correspondents, with the hope that would make the banks more willing to carry farm loans than to call them, and to make new loans, providing relief for beleaguered farmers. Total advances for agricultural and livestock purposes under the authority of the 1921 Act were $298 billion, most of which was extended in 1921 and 1922. Outstanding balances peaked at $201 billion in May 1922 (War Finance Corporation, 1926).

With the creation of the Federal Intermediate Credit Banks to provide agricultural financing on a permanent basis, Meyer felt the WFC was no longer needed, and worked to close the agency.^{Footnote 22} In January 1925, he returned $499 million of WFC capital to the Treasury, and resigned from the WFC.^{Footnote 23} A small amount of direct lending continued through 1928, after which the WFC continued to collect on its outstanding loans until it was closed in 1939.

The WFC loans to industries essential to the war never approached the anticipated amount, as the war ended six months after WFC initiated its operations.^{Footnote 24} The WFC purchases of Treasury bonds were sizable, but ultimately were financed by Treasury sales of short-term debt that financed the repurchase of the war bonds. Rather than the volume of its lending, the significance of the WFC was the precedent it set for federal intervention into credit markets.

VII. THE RECONSTRUCTION FINANCE CORPORATION

Research on the RFC has generally focused on the effectiveness of RFC policies. James Butkiewicz (Reference Butkiewicz1995), Charles W. Calomiris, Joseph R. Mason, Marc Weidenmier and Katherine Bobroff (Reference Calomiris, Mason, Weidenmier and Bobroff2012), and Mason (Reference Mason2001) examine whether RFC loans and provision of capital to banks contributed to financial stability. Daniel Schiffman (Reference Schiffman2003) finds that RFC loans failed to help troubled railroads. Butkiewicz (Reference Butkiewicz1999) and Richard H. Keehn and Gene Smiley (Reference Keehn and Smiley1988, Reference Keehn and Smiley1993) investigate whether publicizing the identity of banks receiving RFC loans contributed to the 1933 financial crisis. Mason (Reference Mason2003) finds that RFC loans were not directed to localities to reap political benefit. Less is made of the fact that Eugene Meyer’s RFC resulted in a vast expansion of federal intervention into the economy.

Meyer was appointed governor of the Federal Reserve Board in September 1930. There was a banking crisis in the final months of 1930, and another banking crisis following Britain’s departure from the gold standard in September 1931. To address banking problems, Meyer felt a financial agency similar to the WFC was necessary even before Britain left gold. However, President Hoover preferred voluntary private action, leading to the creation of the National Credit Corporation (NCC). Due to the NCC’s ineffectiveness, Meyer convinced Hoover of the need for a federal agency.

The Reconstruction Finance Corporation legislation was passed on January 22, 1932. Like the WFC, the RFC was initially capitalized by the US Treasury at $500 million, and could issue bonds to the public or the Treasury to raise an additional $1.5 billion. The RFC’s original powers authorized lending to banks and other financial institutions, railroads, and for crop loans. An amendment to the RFC Act, The Emergency Relief and Construction Act of 1932, approved on July 21, 1932, extended RFC lending powers to self-liquidating public works projects and authorization to lend to states to provide various types of relief (United States Congress 1932).^{Footnote 25} Total RFC lending in 1932 was $1.5 billion (Saulnier et al. Reference Saulnier, Halcrow and Jacoby1958, p. 381). Subsequent amendments vastly expanded the scale and scope of RFC lending authority.

Meyer viewed the RFC as supplementing and extending Federal Reserve lending authority, including making loans on low-quality assets that the Fed could not rediscount:

Meyer left the RFC board at the end of July 1932 for health reasons. In his later years, he stated that his intention was that the RFC be temporary, as was its predecessor, the WFC. However, President Roosevelt greatly expanded the RFC’s activities, financing many New Deal projects and agencies.^{Footnote 27} Under Roosevelt, the RFC recapitalized many banks through purchases of preferred stock and capital notes and bonds. It created the Commodity Credit Corporation to assist farmers and made direct loans to businesses. The RFC Mortgage Company and the Federal National Mortgage Association (Fannie Mae) were RFC creations. It funded the Export-Import banks and dealt in gold when FDR manipulated the value of the dollar.

World War II raised RFC activity to a new high, with RFC activities and extensions of credit reaching 4.5% of GDP in 1944 (Figure 2).^{Footnote 28} Of the $33.3 billion disbursed by the RFC during its existence, $20.9 billion was disbursed to the RFC’s wartime subsidiaries. As was the original purpose of the WFC, the RFC also financed businesses essential to the war effort.

Figure 2. RFC Outstanding Balances/GDP.

The RFC lending decreased dramatically following the war. Congressional concerns about the RFC’s post-war lending practices led to a decision to end RFC lending in 1953. Its operations were terminated in 1957, with residual activities distributed to other governmental agencies. Four agencies’ lineage traces directly to the RFC: the Commodity Credit Corporation, the Export-Import Bank, Fannie Mae, and the Small Business Administration (SBA). The first three agencies were created as part of or with RFC funding. The SBA was created in 1953 to replace the RFC’s lending to small businesses.

While Meyer may have intended the RFC to be a temporary agency, providing relief to troubled banks, the precedent he set through both the WFC and the RFC opened the door to a vast expansion of federal lending powers. He had paved the way for a new and ultimately expanding role of government as a financial intermediary and rescuer of troubled businesses, a revolution in federal financial intervention. The United States federal government has become a permanent and prominent influence in the allocation of credit.

VIII. MEYER TODAY

Would Meyer have supported the US Treasury and Federal Reserve responses to the 2007–08 financial crisis? It seems clear that he would have favored intervention to stabilize the economy. He always believed that provision of finance was essential to support economic activity, which is no surprise, given his career in investment banking. And one of his stated goals was to eliminate financial panics. After the panic of 1907, he wrote to his sister stating his desire to find a way to end financial disruptions, as he planned to enter public service in the future:

The fact that the 2007–08 crisis was the result of a speculative bubble would not have deterred Meyer. He felt the Great Contraction of 1929 to 1933 was preceded by speculation in both stocks and real estate, and that “real estate speculation was perhaps worse than the stock market speculation had been, though less spectacular” (Meyer Reference Meyer1974, Box 181).

As noted above, Meyer believed that unemployment was wasteful and that reducing unemployment should not be left to the market if alternative policies would reduce it faster. He would not have wanted the crisis to devolve into a depression.

Meyer was not wedded to the status quo. He believed that economics was an art and that its application evolved over time. Late in life, he reflected on the legislation of securities market regulations as a necessary response to the speculation that preceded the Great Contraction, observing: “You never could have passed a federal law at that time dealing with the supervision of bonds, stocks, flotation of companies publicly under any federal authority, just because they hadn’t gotten around to thinking of those problems as national problems in the sense that the depression made clear as necessary” (Meyer Reference Meyer1961, p. 542).

While Meyer’s tenure at the Federal Reserve is characterized as a period of failed response to the contraction of 1929 to 1933, he did push for more aggressive policies (Butkiewicz Reference Butkiewicz2008). He wanted an aggressive policy of open market operations, but was thwarted by the governors of the district banks, who held the operational authority for policy. He created the RFC when he felt that the Federal Reserve was not doing enough to help banks, especially non-member banks. As Friedman and Schwartz conclude, “Perhaps, if he had had more time to develop his leadership of the System, he might have been able to lead the System along a different route” (1963, p. 417). Meyer favored intervention during the interwar period, and would have continued to favor intervention today.

IX. THE INFLUENCE OF ACADEMIC SCRIBBLERS

Eugene Meyer disavowed the laissez-faire economic philosophy he had learned from William Graham Sumner at Yale. His thinking was heavily influenced by the German economics professor Adolph Wagner. Meyer concluded that Wagner’s teachings were appropriate for Germany but not yet for the United States. This conclusion convinced him that economics was not determined by universally applicable “natural laws,” as Sumner taught, but was relative to the circumstances. Meyer concluded that economics was a pragmatic art, not a science (Meyer Reference Meyer1974, Box 179).

Applying his pragmatic approach to economics, Meyer believed that markets function well under “normal” conditions, but that the “abnormal conditions” after the war created economic instability that could be remedied only through government intervention (Meyer Reference Meyer1974, Box 180). Thus, he became the foremost proponent of federal government financial intervention to stabilize markets during periods of economic difficulty.

His first duties during the war included purchasing essential commodities for the war effort. Frequently, he would refuse to make purchases at the prevailing market price. In these instances, he typically sought to negotiate a price he considered to be “fair.”

His responsibilities at the War Finance Corporation included buying Liberty and Victory bonds to stabilize price fluctuations. Later, he was able to convert the WFC into an export and then agricultural credit agency. His objective was to stabilize markets, with the hope of reversing some of the deflation that had depressed prices of agricultural products, thereby providing relief to distressed farmers. The WFC lending in 1921–22 was the first federal bank rescue operation.

During the contraction phase of the Great Depression, Meyer again felt the need for a federal financial rescue, ultimately convincing President Hoover of the need for a federal financial agency, the Reconstruction Finance Corporation. Under Meyer, the RFC primarily lent money to provide liquidity to the distressed banking sector, while RFC activities greatly increased during the New Deal and Second World War.

Meyer understood that the RFC was the direct opposite of laissez-faire philosophy he had learned in college. He concluded that “abnormal” circumstances justified government intervention. However, he also felt that such intervention should be temporary, and should be terminated when conditions returned to “normal” (Meyer Reference Meyer1954, p. 27).

But the door that Meyer opened with the WFC and RFC was never closed. During FDR’s presidency, the off-budget borrowing and lending powers of the RFC afforded numerous opportunities for federal intervention into the allocation of credit and the resulting resource allocation of the economy. Federal intervention in the allocation of credit and financial rescues have continued to the present, much of it through the descendants of the RFC, including the Commodity Credit Corporation, the Export-Import Bank, Fannie Mae, and the Small Business Administration.

Whether, or when, federal intervention into credit markets and the US economy would likely have occurred had Eugene Meyer never held a government position is a matter of speculation. Meyer opened the door, and FDR, following him, plowed a much wider path.

Almost single-handedly, Eugene Meyer paved the way for a revolution of federal financial rescues in the American economy. For better or worse, this is his legacy.