When Government Lends

May 2, 1955

Our direct official government debt is $277 billion. This in itself should be colossal enough to disturb any citizen who studies its implications. But the Hoover commission, in its report of March 13 on Federal lending agencies, found, in addition, that government loans, guarantees, insurance, and contingent liabilities, created through more than a hundred different Federal agencies, totaled $244 billion.

The commission’s report made various suggestions for reducing the government’s proliferating lending agencies and putting others more nearly on a business basis. Yet moderate as its suggestions were, five of the twelve commission members thought they went too far.

The majority recommendations were based in part on a report of 257 pages prepared by a group headed by Paul Grady, a partner of Price, Waterhouse & Co. This task-force report was not made public until later. It is hard to see how any member of the commission could have read it and still remained blind to the mischief and danger of government lending to private business.

Whoever was principally responsible for drafting the task-force report not only knew the principles of accounting, but had a firm grasp of both economic and political principles and a gift for pithy, aphoristic statement. The first 25 pages are a model of what such a report should be. It would be a tragedy if it should gather dust while more billions of the taxpayers’ money are recklessly “loaned” away.

The temptation to quote from this report is limited only by space. A few excerpts may indicate its quality:

“It sometimes happens that a program accomplishes its original objectives, and then continues to function ostensibly for the same but actually for other purposes.” (This might be said of much more than lending programs; it is a sort of universal bureaucratic law.) “REA is an example. . . . Although more than 90 percent of the nation’s farms are electrified, the sponsors of the REA program foresee no end to the need for ever increasing amounts of government loans for rural electrification.” The report goes on to cite the RFC and other examples:

“Ever since the depression of the early 1930s, we have made virtually a fetish of financial security for the individual, and by our successive governmental efforts to enhance it, we have loaded more and more of the inherent financial risks of our economic life on the Federal Treasury. . . . No economic system is free from risks of loss. . . . The savings of our people must stand the losses of our enterprises if there are losses. There is no way around this, no matter how remote we are able to make the settlement appear. . . .

“We may not like to acknowledge it, but it is an essential truth that many in our society, though they may honestly wish to try, are not capable of being successful businessmen, successful farmers, or even successful home owners. The failures of such people may be personal misfortunes but there seems little justification for assessing the taxpayers to cover their losses. . . .

“It is not possible for the government to assist one competitor without placing handicaps in the path of another. . . .

“Human nature and politics being what they are, occasional windfall profits are virtually an inevitable accompaniment of government lending. Subsidies in one form or another are an essential characteristic of government lending and a windfall profit is only a subsidy grown up. . . .

“Government lending programs and government guarantee programs have a fatal attraction politically. They can be used handily to bestow favor on particular groups and persons. . . . Because it is attractive politically, government lending grows and grows. Each successive national administration offers more than the last lest there appear to be retrogression.”

Finally, the task force quotes from the prophetic statement of the first Hoover commission in 1949: “Direct lending by the government to persons or enterprises opens up dangerous possibilities of waste and favoritism. . . . It invites political and private pressure, or even corruption.”