Governor Eugene Meyer and the Great Contraction

Eugene Meyer was a highly respected financier and government official when he was appointed Governor of the Federal Reserve Board in 1930. Through his force of character, he dominated economic policy making during the last years of Hoover’s administration. He initially found that sizable foreign short-term claims had put the Fed in a precarious position. After reductions in interest rates reduced foreign claims relative to the Fed’s gold reserves, he developed a plan for expansion. His initial plans were constrained by the weak institutional structure of the Fed and the lack of free gold. He obtained legislation creating the Reconstruction Finance Corporation and section 3 of the 1932 Glass-Steagall Act, temporarily allowing use of government securities as collateral for Federal Reserve notes, overcoming the free gold problem. However, when the 1932 open market policy failed to produce an immediate expansion of bank credit, the Federal Reserve Bank governors were able to end additional expansionary policies. Suffering from poor health, political stalemate, and possible sensing Hoover’s ultimate defeat, Meyer’s expansionary efforts effectively came to an end in August 1932. Thus, in spite of strong leadership favoring expansion, the Fed was unable to pursue a sustained expansionary policy. This failure was the direct result of the increased decentralization of power due to the creation of the Open Market Policy Conference in 1930. Foreign claims on the dollar, particularly French claims, were always a serious concern, at times imposing a dominate constraint on policy. The free gold issue was viewed as a real constraint within the Fed. The 1932 open market policy was not a disingenuous ploy to forestall other legislation. It was the direct result of Meyer’s desire to counter the deflationary forces depressing the economy.