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By mid-1932 the unemployment rate stood at nearly 20 percent of the total labor force. In some industries, such as steel and automobiles, the rate was closer to 50 percent. These were levels unprecedented in U.S. history, and the number of unemployed people overwhelmed the ability of private charities and state and local governments to provide relief. Many Democrats took note of Hoover’s willingness to assist banks, railroads, and other large concerns through the Reconstruction Finance Corporation; why not, then, allow the RFC to extend loans to state and local governments and private charities so that they could continue their relief efforts and expand public works? The president responded with a stinging veto message; however, just a few weeks later he signed a compromise bill, the Relief and Reconstruction Act, which authorized the RFC to finance up to $15 billion in what Hoover called “self-liquidating” public works – that is, projects such as toll roads, which might at some point pay for themselves. The bill also allowed the RFC to lend up to $300 million to state and local governments to sustain their relief efforts.
Source: Herbert Hoover, “Veto of the Emergency Relief and Construction Bill,” July 11, 1932. Online by Gerhard Peters and John T. Woolley, The American Presidency Project. http://www.presidency.ucsb.edu/ws/?pid=23157.
I am returning herewith, without my approval, H. R. 12445, “Emergency relief and construction act of 1932”. . . .
. . . .I have expressed myself at various times upon the extreme undesirability of increasing expenditure on nonproductive public works beyond the $500,000,000 of construction already in the Budget. It is an ultimate burden upon the taxpayer. It unbalances the Budget after all our efforts to attain that object. It does not accomplish the purpose in creating employment for which it is designed, as is shown by the reports of the technical heads of the bureaus concerned that the total annual direct employment under this program would be less than 100,000 out of the 8,000,000 unemployed. Strongly as I feel that this departs from sound public finance, and that it does not accomplish the purpose of which it is instituted, I am not prepared for this reason alone to withhold my assent to the bill provided there is a proper provision that (except for expenditure on public roads which is deductible from future appropriations, together with park and forest roads and trails) these works should not be initiated except on certificate of the Secretary of the Treasury that the moneys necessary for such expenditure are available or can be obtained without interference with current financing operations of the Government. The expression of this principle in the present bill is not in this form and is not adequate. . . .
[This bill represents a] major extension of the authority of the Reconstruction Finance Corporation. The creation of the Reconstruction Finance Corporation itself was warranted only as a temporary measure to safely pass a grave national emergency which would otherwise have plunged us into destructive panic in consequence of the financial collapse in Europe. Its purpose was to preserve the credit structure of the nation and thereby protect every individual in his employment, his farm, his bank deposits, his insurance policy, and his other savings, all of which are directly or indirectly in the safe keeping of the great fiduciary institutions. Its authority was limited practically to loans to institutions which are under Federal or State control or regulation and affected with public interest. These functions were and are in the interest of the whole people. . . .
. . . .[M]y major objection to the measure, as now formulated, lies in the inclusion of an extraordinary extension of authority to the Reconstruction Corporation to make loans to “individuals, to trusts, estates, partnerships, corporations (public or quasi public or private), to associations, joint-stock companies, States, political subdivisions of States, municipalities, or political subdivisions thereof.”
The following objections are directed to this particular provision:
First. This expansion of authority of the Reconstruction Corporation would mean loans against security for any conceivable purpose on any conceivable security to anybody who wants money. It would place the Government in private business in such fashion as to violate the very principle of public relations upon which we have builded our Nation, and render insecure its very foundations. Such action would make the Reconstruction Corporation the greatest banking and money-lending institution of all history. It would constitute a gigantic centralization of banking and finance to which the American people have been properly opposed for the past 100 years. The purpose of the expansion is no longer in the spirit of solving a great major emergency but to establish a privilege whether it serves a great national end or not.
Second. One of the most serious objections is that under the provisions of this bill those amongst 16,000 municipalities and the different States that have failed courageously to meet their responsibilities and to balance their own budgets would dump their financial liabilities and problems upon the Federal Government. All proper and insuperable difficulties they may confront in providing relief for distress are fully and carefully met under other provisions in the bill.
Third. The board of directors of the Reconstruction Corporation informed me unanimously that miscellaneous loans under this provision are totally impracticable and unworkable. It would be necessary to set up a huge bureaucracy, to establish branches in every county and town in the United States. The task of organization, of finding competent personnel, would not be a matter of months but of years. Hundreds of thousands of applications representing every diversity of business and interest in the country would immediately flood the board, all of which must be passed upon by seven men. The directors would be dependent upon the ability and integrity of local committees and branch managers. Every political pressure would be assembled for particular persons. It would be within the power of these agencies to dictate the welfare of millions of people, to discriminate between competitive business at will, and to deal favor and disaster amongst them. If it be contended that these hundreds of thousands of miscellaneous loans will be used to increase employment, then an additional bureaucracy for espionage must follow up each case and assure that these funds be used for such purpose.
Fourth. The sole limitation under the bill is that loans shall be secured and that the borrowers shall not have been able to obtain loans from private institutions upon acceptable terms. This at once throws upon the corporation all the doubtful loans in the United States. It would result in every financial institution calling upon their customers whom they regard as less adequately secured to discharge their loans and to demand the money from the Government through the Reconstruction Corporation. The organization would be constantly subjected to conspiracies and raids of predatory interests, individuals, and private corporations. Huge losses and great scandals must inevitably result. It would mean the squandering of hundreds of millions of public funds to be ultimately borne by the taxpayer.
Fifth. The bill provides only the funds to the corporation which the Senate with reason deemed the minimum necessary to aid construction projects and to cover loans to the States in aid of distress. There is, therefore, no provision in the bill for any sum of money for the purpose of these miscellaneous loans. The corporation would thereby be charged with a duty impossible to carry out in practice with no additional funds with which to make loans unless the unemployment projects and the loans to the States are abandoned or seriously curtailed and the fundamental purpose of the legislation defeated.
Sixth. Under the new obligations upon the Reconstruction Corporation to finance the additional construction activities and loans to the States in addition to its present activities it will be necessary for the corporation to place over $3,000,000,000 of securities. It can place these securities only because the credit of the United States is pledged to secure these obligations. To sell any such vast amount of securities at a time like this is a difficult enough task, strong as is the credit of the United States, without having the credit of the Government undermined by the character of use to which it is directed that these moneys should be applied. As long as obligations of the corporation are based on wholly sound securities for self-liquidating purposes, of which early repayment is assured, there is no burden upon the taxpayer. There is an assurance of a strengthening of the economic situation. But if the funds of the corporation are to be squandered by making loans for the purposes here referred to, it will be at once evident that the credit of the Government is being misused and it is not too much to say that if such a measure should become law it further weakens the whole economic situation by threatening the credit of the United States Government with grave consequences of disaster to our people.
This proposal violates every sound principle of public finance and of government. Never before has so dangerous a suggestion been seriously made to our country. Never before has so much power for evil been placed at the unlimited discretion of seven individuals.
In view of the short time left to the Congress for consideration of this legislation and of the urgent need for sound relief measures, the necessity of which I have on several occasions urged upon the Congress, I recommend that a compromise should be reached upon terms suggested by members of both Houses and both parties, and that the Congress should not adjourn until this is accomplished. Such compromise proposal should embrace:
First. Title I of H.R. 12445, the act now under consideration, covering provisions for loans to States in amount of $300,000,000 for the care of distress in States where needed.
Second. Title III of this act, with the provision made applicable to all parts of the title except for roads and trails, that such works shall not be initiated except on certificate of the Secretary of the Treasury that the funds necessary are available and can be obtained without interference with the current financing operations of the Government.
Third. That there should be substituted for Title II the substance of the provisions in the substitute bill introduced by Senator Wagner and passed by the Senate, or Senate bill 4822, introduced by Senator Barbour, or section 4 of the substitute bill introduced by Representative Hawley. Among them they provide not only loans for construction work of projects of self-liquidating character but also essential aids to agriculture.
Fourth. That the corporation be authorized to increase its issues of capital by $1,800,000,000 for these purposes.
With the utmost seriousness I urge the Congress to enact a relief measure, but I can not approve the measure before me, fraught as it is with possibilities of misfeasance and special privileges, so impracticable of administration, so dangerous to public credit and so damaging to our whole conception of governmental relations to the people as to bring far more distress than it will cure.