R. F. C.

To inflate or not to inflate was no longer a question last week. The only question: Will inflation succeed? Upon the answer (which many think will soon be apparent) depends the immediate economic future of the U. S. If it succeeds the downward spiral of deflation will be definitely checked. If it fails, historians may well look back upon 1932 with a shudder. In prospect, however, was not the wind of wild printing-press inflation which afflicted Germany and France but rather a rescue of credit from its enemy, deflation. Success required large plans, bold men.

Forces for inflation worked busily last week in congress where the House whipped through a bill to create a Reconstruction Finance Corp., keystone of Presi dent Hoover's whole relief program. The vote was 335-10-55. By a vote of 63-10-8 the Senate a week before passed a similar measure. The thumping big Congressional majorities echoed the nation's great expectations. What opposition there was came from literal-minded gentlemen who could not find the word "food"' in the re lief bills. Yet to be settled in conference were secondary differences between the House & Senate measures. With R. F. C. as good as law, the Stock Exchange began moving up hopefully while President Hoover, impatient, made ready to sign the legislation before this week is out. The new agency was scheduled to be in operation by Feb. 1. What would happen thereafter was anybody's guess.

President Hoover took the first step toward organizing R. F. C. when he began to name its seven directors, four of whom must be Republicans, three Democrats. By law the Secretary or Undersecretary of the Treasury, the Governor of the Federal Re serve Board (Eugene Meyer) and the Farm Loan Commissioner (Paul Bestor) are R. F. C. directors, accounting for three of the four Republican places. About the White House last week it was generally assumed that two of the Democratic directors of R. F. C. would be Bernard Mannes Baruch, New York financier and onetime chairman of the War Industries Board, and Edward Nash Hurley, Chicago banker and onetime chairman of the Shipping Board. For active president of R. F. C. was needed a man with a repu tation for vigor as well as for banking. Mr. Hoover chose his week-end visitor, Charles Gates Dawes.

Once organized, the R. F. C. directors will begin immediately to accumulate operating capital. Congress, as a starter, will vote a direct appropriation of $500,000,000 from the Treasury. Then R. F. C. will move to raise $1.500,000,000 from the public by the sale of its bonds, debentures, short-term notes. R. F. C. securities will be underwritten by the U. S. Government. Much depends upon this public sale which Wall Street envisages as a sort of Liberty Loan drive. President Hoover hopes that plain citizens, rather than banks and trusts, will be heavy investors. To pave the way for this great flotation the Fed eral Reserve has already started pumping money out into the market to create the necessary buying power. Last week in New York it whittled down its buying rates for bankers' acceptances.

If, however, the public does not respond to this sale, the Treasury is authorized to sell straight government bonds and turn the proceeds over to R. F. C. in return for its unmarketed securities. One issue still in dispute between the House & Sen ate: Shall the Federal Reserve rediscount the collateral accepted by R. F. C. for its loans? The Senate, led by Virginia's Glass, said NO on the ground that such collateral will of necessity be inferior and would therefore weaken the Federal Reserve's strength.

With $2,000,000,000 in hand, R. F. C. will be ready to function as a colossal credit agency. Loan applications are limited to one year but the President may extend this to two. Loans will run for three years, renewable for two more. After five years the four non-Government directors will be dropped from the Board and five years later! R. F. C. must be liquidated. Authorized borrowers: "Any bank, savings bank, trust company, building & loan association, insurance company, intermediate credit bank, livestock credit corporation, agricultural or farmers' association or other bona-fide financial institution"--and the railroads. Individual loans are limited to $200.000.000 and R. F. C. directors are free to fix interest rates.

What will be R. F. C.'s loaning policy? That is the first and all-important question its directors will have to answer. The law gives them wide discretion, only forbidding them from accepting foreign securities. A sample case: a "sick" railroad comes before R. F. C. for help; it must meet a $40,000,000 bond issue within the month or go into receivership; the Railroad Credit Corp. has advanced it $15,000,000 from the increased freight rate pool and taken its last shaky collateral. Will R. F. C. let it have $25,000,000 on nothing more than its promise to pay? How R. F. C. directors answer that question and others like it will depend in large measure the success or failure of R. F. C.

If R. F. C., controlled by cautious and fuzzy-thinking directors, demands A-1 collateral for all its loans, its services will be little better than that of an ordinary commercial bank. Its friends point out that R. F. C. as an emergency organization must put aside chicken-heartedness, take financial risks, forget about profits and boldly advance its credit on security which, at the moment, looks inferior. Ordinary commercial banking rules must go by the board, it is argued, if R. F. C. is to perform the task the administration has set for it.

One of the first things R. F. C. is expected to do is to take over the activities of National Credit Corp., a private agency launched with an official fanfare at the White House last October, but whose activities have been limited. With a permitted capital of $500,000.000 it has called for only $100.000,000 in cash from its subscribers.

R. F. C. credit will be largely used as a bank crutch. It will, its friends hope, relieve the strong banks of the job of carrying the weak ones, thus freeing their liquid assets for more constructive purposes. The one great danger cited is that R. F. C. may so load itself up with all the frozen securities now clogging the banks that it will itself go into a frigid state and sink out of helpfulness.

What gives the greatest hope for R. F. C.'s loan policy and therefore its success is the automatic presence on its board of Eugene Meyer. Governor Meyer is in a sense the originator of the credit club to fight the fears and panics of a Depression (FORTUNE, Jan. 1932). As director of the War Finance Corp. after which R. F. C. is patterned almost item for item, he evolved and put to use his economic theory in the 1921 slump. He knows to a nicety how many millions or billions of dollars one needs at one's elbow to annihilate this or that bugaboo of deflation. It may not be necessary or practical to use them all but psychologically their very handiness makes them effective.

It was Governor Meyer, perhaps more than any other man, who shaped President Hoover's general policy of relief--a whole battery of credit clubs to be kept swinging in every direction. Out of Governor Meyer's economic experience and wisdom came the figure--$2,000,000,000--of what was needed to make R. F. C. a real treat to the intangibles of this Depression. His ideas and those of Mr. Baruch run along parallel lines. These two and President Dawes are expected to be the three strong and active men on R. F. C.'s directorate.

Most economists view R. F. C. as inflation--the creation of credit where credit did not exist before. But President Hoover, like many another man to whom words are good or bad per se, dislikes the word inflation, prefers to call his relief policies counter-deflation. Business and banking have been spinning in a downward spiral--bank runs, heavy sales of assets to keep liquid, reduced security values, more fear, more runs, more sales, still lower values. It is to arrest this process that the Government has interposed R. F. C. on the theory that $2,000,000,000 will cushion the fall, stop it. perhaps turn it up in the opposite direction. Once it turns, however, it becomes to economic realists, inflation. Last week this purpose of the Hoover policy--the artificial creation of credit--was publicly discerned by the Press as far away as France.

One factor generally overlooked in this whole relief program is the source of new capital to be put up by the Government. Cash required from the Treasury: $500,000,000 for R. F. C.; $125,000,000 for Federal Land Banks; $150,000,000 for Home Loan Discount Banks; $150,000,000 for Depositors Relief Corp. Thus, to make the Hoover program work, a total of $925,000,000 must be appropriated by Congress from a Treasury already going $2,300,000,000 into the red this year.

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