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New Deal Lessons for AIG

Eric Rauchway offers some some slices of New Deal history that seem relevant to the current debate over AIG. First, Jesse Jones, head of the Reconstruction Finance Corporation, from his memoir Fifty Billion Dollars (which was a ton in the thirties!):

The RFC acquired voting control of Maryland Casualty in April, 1934, when we first bought preferred stock in the Company. At that time we sent Silliman Evans to Baltimore to take the presidency of the company and Edward G. Lowry, Jr., of our legal department, to be its vice president and special counsel, each being elected as director. Mr. Evans later became chairman of the board…. When we got into the company, the situation was so much worse than had been represented that we felt it necessary to replace the management.

And this from James Olson’s book Saving Capitalism:

For political reasons, Jesse Jones often toyed with the salaries of corporate management, especially if they were, in his mind, “over-paid” Wall Streeters. Jones and Roosevelt knew that RFC loans always had the potential of political trouble — stirring up liberal Democrats and progressive Republicans who were blaming businessmen for getting the country into such an economic mess. Salary reductions were one way of showing that RFC, even while it was pouring billions into private business, was not enriching corporate management. Amendments to the RFC Act in 1933 required Jones to certify the appropriateness of the salaries paid by every corporation accepting loans and investment money. Jones devised a declining scale of salary reductions. Corporate management receiving annual salaries of $150,000 or more would be cut to $60,000, $100,000 or more to $50,000, and other reductions accordingly.

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The RFC doesn’t get a ton of discussion today, but I think there’s plenty of evidence that its activities were more important to the 1933–36 growth spurt than was that era’s rather modest fiscal expansion. Basically the idea was to set up a public agency that could make the loans that the banking system couldn’t or wouldn’t do. Today’s TALF, run as a Fed/Treasury partnership, is designed to serve a similar function but works quite differently and has mechanisms in place designed to make it less political — and, not coincidentally, more business-friendly.