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168 PART III/DEBACLE OF AN IDEA<br />
in loans to states and territories for relief and work relief, and $1 1/2<br />
billion for loans or contracts for various kinds of works projects. The<br />
funds were made available through the Reconstruction Finance Corporation<br />
.and could be lent to states and subdivisions, to regulated housing<br />
corporations for slum clearance and for housing low-income groups, and<br />
to private corporations for a wide variety of construction projects devoted<br />
to public use. The act also authorized some $322 million for emergency<br />
construction of certain authorized public works. Finally, it<br />
amended Section 13 of the Federal Reserve Act to permit Federal Reserve<br />
banks in emergency directly to discount certain classes of eligible<br />
paper that formerly came to them through member banks.<br />
By the middle of 1931, the voluntary movement to hold wage levels had<br />
broken down, and in September the U. S. Steel Corporation began wage<br />
cuts, a policy which soon became general. In harmony with his philosophy,<br />
Hoover opposed the rising demand for government unemployment<br />
insurance schemes.<br />
At the same time that Hoover, at the cost of his political career, opposed<br />
the spreading demand for government intervention, he approved<br />
an amendment to the Federal Reserve Act that laid the foundation for the<br />
greatest invasion of government into the economy in American history.<br />
Probably he could no longer withstand the rising demand for inflationary<br />
measures, particularly in the House of Representatives, which came<br />
under Democratic Party control in the 1930 elections.<br />
The existing Federal Reserve statute, as we have noted earlier, required<br />
Federal Reserve notes to be backed by 40 per cent gold and 60<br />
per cent eligible short-term commercial paper. This was in accordance<br />
with the theory that the circulation should respond to the ebb and flow<br />
of commercial transactions requiring cash.<br />
It was now asserted that the note issue power was being restricted by<br />
reason of the scarcity of eligible paper. Meantime, federal revenues had<br />
fallen drastically, from $4,177 million in 1930 to less than half that in<br />
1932, and there was an urgent need for cash to meet the federal deficit,<br />
which amounted to $2.8 billion for the fiscal year 1931 (endingJune 30).<br />
The Administration-sponsored Glass-Steagall Act of February 27,<br />
1932, allowed government bonds as a substitute collateral for commercial<br />
paper in the note reserve. The act also loosened the eligibility requirement<br />
for discount by allowing the Federal Reserve banks to make<br />
advances to member banks on their promissory notes secured by any<br />
assets satisfactory to the Federal Reserve bank. While this act was a<br />
temporary measure, limited to one year, its effects persisted, for it broke
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