Reconstruction Finance Corporation

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RECONSTRUCTION FINANCE CORPORATION

RECONSTRUCTION FINANCE CORPORATION. After the 1929 stock market crash, the banking system verged on failure. Anxious depositors ran on banks to get their money out; banks had less money to give because they had invested in the collapsing stock market; more banks failed; depositors grew increasingly nervous; and banks continued selling off stocks, which depressed the market even further. In January 1932, on the recommendation of President Herbert Hoover, Congress created the Reconstruction Finance Corporation (RFC), which would use government money to make loans to banks, railroads, and insurance companies. In July, with the crisis deepening, the Emergency Relief and Reconstruction Act authorized the RFC to make loans directly to farmers, states, and public works projects.

Hoover was wary of any sort of government intervention in the marketplace. He was slow to propose the RFC because he hoped bankers could solve their own problem, and he never stopped viewing it as a temporary agency. Hoover's chairmen (Eugene Meyer and Atlee Pomerene) insisted on an overly conservative set of guidelines. The RFC's loans carried high interest rates (they did not want to compete with private lenders), and its collateral requirements were extremely rigid. Moreover, RFC-funded public works projects had to pay for themselves (hydroelectric plants or toll bridges, for example). According to Hoover and his advisers, the primary purpose of the RFC was to encourage banks to start making loans again so the private sector could initiate its own recovery. It lent almost $2 billion in its first year, which was enough to serve the immediate goal of delaying a banking catastrophe, but the money did not inspire the expected general economic upturn.

In February 1933 the banking system collapsed again. President Franklin Roosevelt, inaugurated in March, had none of Hoover's reservations about state capitalism. Roosevelt immediately declared a banking holiday and passed the Emergency Banking Relief Act, which empowered the RFC to oversee bank reorganizations and invest directly in struggling financial institutions through preferred stock purchases. President Roosevelt and RFC chairman Jesse Jones continually enlarged and modified the RFC's mission to meet specific needs, and the RFC played a vital role in the evolution of the New Deal. The federal Emergency Relief Administration was modeled on the RFC state grant program, and the Public Works Administration was spun off from its public works division. The RFC also helped to finance many New Deal agencies because its semi-independent status allowed President Roosevelt to work around Congress and to work quickly. The RFC made loans to the Home Owners' Loan Corporation ($200 million), the Farm Credit Administration ($40 million), and the Works Progress Administration ($1 billion). Even greatly expanded, however, the Depression-era RFC ultimately failed in its Hoover-conceived mission of reinvigorating private investment.

During World War II, Roosevelt converted the RFC from a recovery agency to a wartime agency. The RFC and its wartime subsidiaries, including the Rubber Reserve Company, the Defense Plant Corporation, and the War Damage Corporation, handed out $40 billion in loans during the war. The massive defense buildup finally generated the elusive economic recovery.

When Dwight Eisenhower was elected president (1952), memories of the Great Depression, the New Deal, and even World War II were becoming increasingly distant, and the idea of keeping government and business separate regained some of its Hoover-era popularity. Congress abolished the RFC in July 1953.