Creature From Jekyll Island by G. Edward

THE PUBLIC BE DAMNED

In his letter of transmittal accompanying the staff report, C o n g r e s s m a n Patman provided this s u m m a r y : It was as though everyone was a part of a close knit club in which Penn Central and its officers could obtain, with very few questions asked, loans for almost everything they desired both for the company and for their own personal interests, where the bankers sitting on the Board asked practically no questions as to what was going on, simply allowing management to destroy the company, to invest in questionable activities, and to engage in some cases in illegal activities.

These banks in return obtained most of the company's lucrativebanking business. The attitude of everyone seemed to be, while thegame was going on, that all these dealings were of benefit to everymember of the club, and the railroad and the public be damned.

The banking cartel, commonly called the Federal Reserve

System, was created for exactly this kind of bailout. Arthur Burns, who was the Fed's chairman, would have preferred to provide a direct infusion of newly created money, but that was contrary to the rules at that time. In his own words: "Everything fell through.

We couldn't lend it to them ourselves under the law.... I worked on this thing in other ways.""

The company's cash crisis came to a head over a weekend and, in order to avoid having the corporation forced to file for bankruptcy on Monday morning, Burns called the homes of the heads of the Federal Reserve banks around the country and told them to get 1 "Perm Central: Bankruptcy Filed After Loan Bill Fails," 1970 Congressional Quarterly Almanac (Washington, D.C.: Congressional Quarterly, 1970), p. 811.

2- Quoted by Welles, pp. 404-05.

3- Quoted by Welles, p. 407.

44 THE CREATURE FROM JEKYLL ISLAND

the word out immediately that the System was anxious to help. On Sunday, William Treiber, who was the first vice-president of the New York branch of the Fed, contacted the chief executives of the ten largest banks in New York and told them that the Fed's Discount Window would be wide open the next morning. Translated, that means the Federal Reserve System was prepared to create money out of nothing and then immediately loan it to the commercial banks so they, in turn, could multiply and re-lend it to Penn Central and other corporations, such as Chrysler, which were in similar straits.1 Furthermore, the rates at which the Fed would make these funds available would be low enough to compensate for the risk, ^peaking of what transpired on the following Monday, Burns boasted: "I kept the Board in session practically all day to change regulation Q so that money could flow into CDs at the banks." Looking back at the event, Chris Welles approvingly describes it as "what is by common consent the Fed's finest hour."

Finest hour or not, the banks were not that interested in the proposition unless they could be assured the taxpayer would co-sign the loans and guarantee payment. So the action inevitably shifted back to Congress. Penn Central's executives, bankers, and union representatives came in droves to explain how the railroad's continued existence was in the best interest of the public, of the working man, of the economic system itself. The Navy Department spoke of protecting the nation's "defense resources." Congress, of course, could not callously ignore these pressing needs of the nation. It responded by ordering a retroactive, 13 A per cent pay raise for all union employees. After having added that burden to the railroad's cash drain and putting it even deeper into the hole, it then passed the Emergency Rail Services Act of 1970 authorizing $125 million in federal loan guarantees.3

None of this, of course, solved the basic problem, nor was it really intended to. Almost everyone knew that, eventually, the railroad would be "nationalized," which is a euphemism for becoming a black hole into which tax dollars disappear. This came 1. For an explanation of the multiplier effect, see chapter eight, The Mandrake Mechanism.

2. Welles, pp. 407-08.