Reconstruction Finance Corporation
The Reconstruction Finance Corporation (RFC) was an independent agency of the U.S. government, chartered during the administration of Herbert Hoover in 1932 in response to the Great Depression. It played a major role in the New Deal and World War II. It closed in 1953 and was replaced by the much smaller Small Business Administration.
The RFC was Hoover's most important attempt to deal with the depression. It was proposed by Hoover and created by Congress in January 1932.
The collapse in the value of assets combined with demands from panicky depositors to get their money out meant that many banks that were otherwise solvent, hoarded their money and refused to make loans. It was much like the Financial Crisis of 2008.
The RFC could make loans to banks, insurance companies and railroads. The Emergency Relief and Construction Act of July 21, 1932, enlarged its power to allow for loans to state government and to farm agencies. The immediate aim was to restore confidence in financial institutions generally and encourage them to start lending again, prevent ruinous bankruptcies that would further destabilize the shaky economy, and—hopefully—revive the economy through the restoration of credit.
The RFC was capitalized at $500 million (comparable in size to $75 billion in 2009), provided by the federal government, and it was empowered to sell $3.3 billion (comparable to $500 billion in 2009) of debentures. Through the end of the Hoover administration $2.2 billion was actually loaned to authorized borrowers (comparable to $350 billion). The RFC saved many railroads, banks, and insurance companies. Democrats limited its effectiveness by overly stringent security requirements for loans and by the decision of Congress to require public disclosure of borrowers, which virtually forced a bank to admit publicly it was in trouble.
The first leaders were M. Eugene Myers, Paul Bestor, and Charles Dawes. In summer 1932 Hoover put Atlee Pomerene in charge. Roosevelt turned to flamboyant Houston banker Jesse Jones.
The RFC advanced $2 billion in loans to state and local governments and to banks, railroads, farm mortgage associations, and other businesses, funding, for example, the construction of the original Hayden Planetarium.
The RFC played a major role in creating the system of work relief in the states that was continued and expanded by the New Deal. Hoover and Roosevelt used the RFC to pump money into the state's relief program by extending loans to businesses and local government projects. It established a federal agency in local communities which provided a reservoir of experienced personnel to implement expanding New Deal programs.
During the New Deal era, the Reconstruction Finance Corporation was given a blank check appropriation by Congress and authority to borrow money. It borrowed twenty or more billions. The RFC would buy the preferred stock of an old railroad or a new corporation and lend it money. RFC dispersed $1.5 billion in 1932, $1.8 billion in 1933, and $1.8 billion in 1934. Loans and subsidies reached $10.6 billion by 1935 (in 1934 the entire GDP was $65 billion). Then it dropped to about $350 million a year. On the eve of World War II it greatly expanded to build munitions factories, dispersing $1.8 billion in 1941. The total from 1932 through 1941 was $9.465 billion.
Starting 1933 Franklin Delano Roosevelt kept the agency, increased the funding, streamlined the bureaucracy, and used it to help restore business prosperity, especially in banking and railroads. He appointed Texas banker Jesse Jones as head, and Jones turned RFC into an empire with loans made in every state. The RFC was almost closed down when it was reinvigorated to deal with the recession on 1937, and again in 1940 when Roosevelt advocated the "Arsenal of Democracy" plan to expand munitions production.
The RFC gave the states loans for emergency relief needs. In a case study of Mississippi, Vogt (1985) examined two areas of RFC funding: aid to banking, which helped many Mississippi banks survive the economic crisis, and work relief, which Roosevelt used to pump money into the state's relief program by extending loans to businesses and local government projects. Although charges of political influence and racial discrimination were levied against RFC activities, the agency made positive contributions and established a federal agency in local communities which provided a reservoir of experienced personnel to implement expanding New Deal programs.
Roosevelt encouraged states to set up public authorities that would borrow money from RFC or PWA for major projects. Many states did so. About half of Pennsylvania's fifty municipal authorities received federal assistance. Between 1933 and 1935, the state of New York created fifteen authorities (compared to 5 previously). Eleven New York authorities sold bonds to the RFC or PWA, and seven received federal grants. Loans funded the Lower Colorado River Authority (a Texas cousin of TVA), the state-owned spa at Saratoga Springs, NY, the Pennsylvania Turnpike, the Hayden Planetarium, the Seattle Street Railways, and scores of rural electrification and irrigation districts. In New York state, Robert Moses's empire of highway, bridge, tunnel, and park authorities were heavy borrowers. Moses focused on self-liquidating projects (tolls or user charges were used to pay off construction debts.) Moses gave high priority to the Triborough Bridge project, and drafted the state legislation establishing an authority to build it. Financing the initial costs of the bridge, including approaches and connections, was shared with New York City.
World War II
RFC disbursed $39.5 billion in loans during the war. The money was all repaid, with interest.
President Roosevelt merged the RFC, Board of Economic Warfare (BEW), and the Lend-Lease Office together under the direction of Leo Crowley, former head of the Federal Deposit Insurance Corporation (FDIC). Oscar Cox, a prime author of the Lend-Lease Act, general counsel of the Foreign Economic Administration joined as well as Lauchlin Currie, who becamne the deputy administrator to Crowley.
The RFC established seven new corporations, and purchased an existing corporation. The eight RFC wartime subsidiaries are Metals Reserve Company, Rubber Reserve Company, Defense Plant Corporation, Defense Supplies Corporation, War Damage Corporation, U.S. Commercial Company, Rubber Development Corporation, Petroleum Reserve Corporation. These corporations were involved in funding the development of synthetic rubber, construction and operation of a tin smelter, and establishment of abaca (Manila hemp) plantations in Central America. Both natural rubber and abaca (used to produce rope products) were produced primarily in south Asia, which came under Japanese control. Thus, these programs encouraged the development of alternative sources of supply of these essential materials. Synthetic rubber, which was not produced in the United States prior to the war, quickly became the primary source of rubber in the post-war years.
From 1941 through 1945, the RFC authorized over $2 billion of loans and investments each year, with a peak of over $6 billion authorized in 1943. The magnitude of RFC lending had increased substantially during the war. Most lending to wartime subsidiaries ended in 1945, and all such lending ended in 1948.
The Petroleum Reserves Corporation was transferred to the Office of Economic Warfare, which was consolidated into the Foreign Economic Administration, which was transferred to the Reconstruction Finance Corporation and changed to the War Assets Corporation. The War Assets Corporation was dissolved as soon as practicable after March 25, 1946. Presidential aide and alleged Soviet spy, Lauchlin Currie headed the office during this time.
Nathan Gregory Silvermaster, who headed a group of Soviet agents working in the U.S. Government during World War II, was transferred, along with the rest of the division from the Treasury Department's War Asset's Administration into to the Reconstruction Finance Corporation, where it became the War Assets Corporation.
RFC engaged in numerous loan activities after the war to help small business. For example, in 1949 Lustron Steel was responsible for one-tenth of the outstanding industrial and commercial loans of the agency. In 1946 its owner Carl Strandlund inspired by the availability of RFC loans, the severe postwar housing shortage and wartime methods of mass production of ships, developed the idea of mass-producing steel-frame homes for sale by local dealers. His ranch-style house used porcelain-enameled steel for exterior and interior walls, window frames, and door jambs, and ceiling panels; components were made in Columbus, Ohio. Lustron stymied by the myriad of local building regulations that mandated conventional materials, and by the impatience of RFC which cut its losses and foreclosed.
After the war the RFC took over the Smaller War Plants Corporation (SWPC), a wartime agency that provided direct loans to small business. In 1950-53 the Small Defense Plants Administration (SDPA) certified small businesses to the RFC when it had determined the businesses to be competent to perform the work of government contracts, especially relating to the Korean war effort. The RFC was replaced in 1953 by the U.S. Small Business Administration. It is still in operation and 20 million small businesses have received direct or indirect help from one or another of those SBA programs.
- Barber, William J. From New Era to New Deal: Herbert Hoover, the Economists, and American Economic Policy, 1921-1933. (1985).
- Butkiewicz, James L. "The Impact of a Lender of Last Resort During the Great Depression: the Case of the Reconstruction Finance Corporation." Explorations in Economic History 1995 32(2): 197-216. Issn: 0014-4983
- Jones, Jesse H. Fifty billion dollars;: My thirteen years with the RFC, 1932-1945 (1951) detailed memoir by longtime chairman
- Koistinen,Paul A. C. Arsenal of World War II: The Political Economy of American Warfare, 1940-1945 (2004)
- Mason, Joseph R. "The Political Economy of Reconstruction Finance Corporation Assistance During the Great Depression." Explorations in Economic History 2003 40(2): 101-121. Issn: 0014-4983 Fulltext in Ingenta
- Olson, James S. Herbert Hoover and the Reconstruction Finance Corporation, 1931-1933 (1977).
- Olson, James S. Saving Capitalism: The Reconstruction Finance Corporation and the New Deal, 1933-1940. Princeton U. Press, 1988. 246 pp.
- Sprinkel, Beryl Wayne. "Economic Consequences of the Operations of the Reconstruction Finance Corporation." The Journal of Business of the University of Chicago Vol. 25, No. 4 (Oct., 1952), pp. 211–224 online at JSTOR
- Vogt, Daniel C. "Hoover's RFC in Action: Mississippi, Bank Loans, and Work Relief, 1932-1933." Journal of Mississippi History 1985 47(1): 35-53. Issn: 0022-2771
- Gerald Taylor White, Billions for Defense: Government Financing by the Defense Plant Corporation During World War II (1980)
- video: Strange, Eric, prod. "Brother, Can You Spare a Billion? The Story of Jesse H. Jones." (1999) Color and black and white. 57 min. Distributed by Houston Public Television, Houston, Tex.
- Daniel C. Vogt, "Hoover's RFC In Action: Mississippi, Bank Loans, and Work Relief, 1932-1933." Journal of Mississippi History 1985 47(1): 35-53. 0022-2771
- Sprinkel (1952)
- Olson 1988
- Annmarie Hauck Walsh, The Public's Business: The Politics and Practices of Government Corporations. (1978) p. 28, 212
- FDR knew in 1933 that Crowley had illegally used FDIC money to cover his embezzelments from his own bank in Wisconsin in 1931. The scandal was kept secret and not known until years after Crowley's death. Stuart L. Weiss, The President's Man: Leo Crowley and Franklin Roosevelt in Peace and War (1996)
- Douglas Knerr, Suburban Steel: The Magnificent Failure of the Lustron Corporation, 1945-1951. 2004.
- See SBA history
- Oral History Interview with Hubert F. Havlik, Truman Presidential Library, June 20, 1973.