Reconstruction Finance Corporation Is Created Summary

  • Last updated on November 10, 2022

Created to support ailing financial institutions during the Great Depression, the Reconstruction Finance Corporation was a government agency that provided capital for New Deal programs, war production, and undercapitalized private ventures.

Summary of Event

The Reconstruction Finance Corporation (RFC) functioned from its establishment on January 22, 1932, until its dissolution in 1954 as a federal agency that provided capital and credit for a wide variety of public and private ventures. Lending more than $51 billion during its existence, the RFC played an instrumental role in stabilizing the American financial system during the early years of the Great Depression by supporting banks and financing numerous New Deal programs. During World War II, the RFC served as a conduit through which the nation’s economic resources were shifted from civilian output to military production. [kw]Reconstruction Finance Corporation Is Created (Jan. 22, 1932) [kw]Finance Corporation Is Created, Reconstruction (Jan. 22, 1932) Reconstruction Finance Corporation Great Depression;New Deal New Deal;Reconstruction Finance Corporation Banking;Reconstruction Finance Corporation [g]United States;Jan. 22, 1932: Reconstruction Finance Corporation Is Created[07980] [c]Banking and finance;Jan. 22, 1932: Reconstruction Finance Corporation Is Created[07980] [c]Business and labor;Jan. 22, 1932: Reconstruction Finance Corporation Is Created[07980] [c]Economics;Jan. 22, 1932: Reconstruction Finance Corporation Is Created[07980] [c]Government and politics;Jan. 22, 1932: Reconstruction Finance Corporation Is Created[07980] Hoover, Herbert Meyer, Eugene Roosevelt, Franklin D. [p]Roosevelt, Franklin D.;New Deal

The stock market crash of 1929 and the onset of the Great Depression created a severe crisis for the nation’s financial institutions. Facing a catastrophic decline in the value of assets and a rush of depositors anxious to recover their money, the American banking system teetered on the brink of collapse. Most vulnerable were institutions holding large amounts of unsecured loans made during the previous decade to finance speculative ventures in the securities, real estate, and construction industries. By 1931, nearly twenty-three hundred commercial banks and savings and loans faced insolvency.

The worldwide financial chaos of the period also contributed to the severity of the situation in the United States. At the beginning of the Depression, European banks began to withdraw substantial amounts of gold reserves held in American banks. Additionally, the Hawley-Smoot Tariff, Hawley-Smoot Tariff Act (1930)[Hawley Smoot Tariff Act] enacted in 1930 with the intention of protecting American firms by increasing import duties, instead produced a worldwide protectionist movement that in turn created a further contraction of available capital and credit in the United States.

President Herbert Hoover, a disciple of voluntarism, initially suggested that those in the financial industry should pool their resources and make loans to ailing banks without governmental intervention. In October, 1931, the National Credit Corporation National Credit Corporation (NCC), a voluntary association that encouraged healthy banks to lend capital to weaker ones, began operation. As the Depression worsened, however, the NCC proved unable to cope with the increasing number of bank failures.

Recognizing the shortcomings of the NCC, on December 8, 1931, Hoover recommended the creation of a government agency with broad powers to issue bonds and extend credit to the financial industry. Congress moved quickly, and Hoover signed the bill creating the Reconstruction Finance Corporation on January 22, 1932. Capitalized at $500 million, the RFC was authorized to borrow an additional $3.3 billion to shore up the nation’s financial infrastructure. The RFC initially was intended only to provide capital to ailing banks, but Congress soon extended its powers to lend money to a variety of public and private organizations. The major economic sectors that received RFC loans included banks and other financial intermediaries, railroads, agriculture, commercial and industrial businesses, mortgage lenders, public agencies, and national defense contractors.

The administrative structure of the RFC included a seven-member board of directors, including the secretary of the treasury and the chairman of the Federal Reserve Board, who served as ex officio members. Eugene Meyer, chairman of the Federal Reserve Board when the RFC was created, became the agency’s first chairman. Meyer served until 1933, when President Franklin D. Roosevelt appointed Jesse H. Jones to head the agency. Jones was followed by Emil Schram and Charles B. Henderson.

During the New Deal, the RFC played a significant role in financing the nation’s economic recovery programs. To alleviate the banking crisis of 1933, the agency purchased more than $1.3 billion of bank stocks, helping to bolster ailing institutions and restore public confidence in the financial system. The RFC also aided the agricultural sector through the creation of a subsidiary, the Commodity Credit Corporation, Commodity Credit Corporation that gave farmers access to RFC funds. The agency also financed the Rural Electrification Administration Rural Electrification Administration and provided credit to tenant farmers for the acquisition of land.

Amendments to the RFC Act empowered the agency to finance home mortgages directly and to purchase the capital stock of mortgage lenders. The creation of the RFC Mortgage Company, which lent nearly $700,000 between 1935 and 1947, and the Federal National Mortgage Association (later known as Fannie Mae), Fannie Mae which financed more than $3 billion in home loans between 1938 and 1950, played a crucial role in expanding the opportunity for home ownership Home ownership (U.S.) in the United States and provided a much-needed boost to the construction industry.

The RFC was also active in supporting public works projects and helped to finance a variety of programs such as bridge and tunnel construction, public housing, natural resource development, and conservation projects. The RFC also organized and funded the Export-Import Bank Export-Import Bank[Export Import Bank] to assist foreign economic development. Between 1934 and 1945, the agency loaned more than $500 million to various Latin American nations, Great Britain, Greece, Turkey, the Soviet Union, and Nationalist China.

In 1934, Congress authorized the RFC to make business loans, provided that they were “adequately secured” and that the companies could not otherwise obtain capital on the open market. Originally, the maximum amount available was $500,000 over a five-year term. Congress later liberalized both the amount ceiling and the maximum maturity. RFC administrators excluded certain industries. For example, no loans were extended to the oil and automotive industries, which were deemed sufficiently profitable to obtain capital without government assistance. The RFC also refused loans to newspapers and radio stations for fear of influencing editorial content.

During World War II, the RFC played a crucial role in shifting economic resources from the civilian to the defense sector. A variety of subsidiary corporations supervised the transfer of credit to defense-related industries. These corporations included the Defense Plant Corporation, the Defense Supplies Corporation, the Rubber Development Corporation, the Metal Reserve Corporation, the War Damage Corporation, and the United States Commercial Company. The largest subsidiary, the Defense Plant Corporation, constructed and equipped twenty-three hundred defense plants at a cost exceeding $9 billion.

Despite a series of damaging scandals during the postwar years, the RFC remained active until July 30, 1953, when President Dwight D. Eisenhower signed the Small Business Act, Small Business Act (1953) which officially terminated the RFC. The Small Business Administration Small Business Administration assumed current RFC loans, and a number of the RFC’s subsidiary corporations, including the Federal National Mortgage Association and the Export-Import Bank, became independent agencies. The RFC terminated its operations in June, 1954, and by 1957 all the agency’s outstanding loans had been liquidated.

Significance

During the early years of the Great Depression, the RFC played a significant role in stabilizing the U.S. financial system. By providing capital and credit to banks, the RFC enabled many otherwise insolvent institutions to continue operations. This had important psychological as well as economic benefits and mitigated the perception held by many Americans that the capitalist system was inherently flawed. The RFC helped ensure that the nation’s economic infrastructure would continue to function and, through infusions of capital, prevented disruptions in one sector from initiating a chain reaction of economic chaos.

The RFC undoubtedly saved many banks, railroads, insurance companies, and farmers. Many historians have observed that the Great Depression would have been far worse without government intervention in capital markets to cushion the effect of declining demand and ease the impact of deflation and unemployment. The RFC failed to generate an economic recovery primarily because the decline in aggregate demand was simply too large to be offset by the RFC’s limited resources. Governmental policy also impeded the potential effectiveness of the RFC during the late 1930’s. In 1937, President Roosevelt tried to balance the budget for political reasons. He instructed the RFC to stop all lending, even though its loans did not appear in the budget. At the same time, the president reduced spending on public works and raised taxes, producing an economic contraction and increasing unemployment. RFC officials believed that this situation could have been avoided by increasing, rather than curtailing, available credit and by continuing public works projects.

The most enduring legacy of the RFC was the establishment of the Federal National Mortgage Association, which revolutionized home finance by providing long-term mortgages. Previously, home mortgages typically had been intermediate-term loans requiring large down payments. Although other factors were involved, home ownership statistics reveal the impact of RFC policies. Prior to 1929, one-third of American families owned homes; by the 1950’s, nearly two-thirds were home owners.

The RFC also had a significant impact in marshaling the nation’s economic resources for defense production during World War II. From 1940 to 1945, more than 80 percent of RFC loans went to support defense-related production, and more than half of all RFC financing occurred during the war years. Through its various subsidiary corporations, the agency constructed war plants, allocated strategic materials, and provided insurance for war-related assets against damage by military operations. As a result of its wartime activities, by the end of the war the RFC held substantial interests in a number of industries such as shipping, nonferrous metals, machine tools, synthetic rubber, and aviation.

During the postwar period, the RFC suffered from a series of scandals surrounding its involvement in providing capital for housing production. Congressional investigations revealed that the RFC had offered loans to highly speculative ventures supported by a number of senators and administration officials, in return for a promise of increased funding for the agency. The scandal tarnished the RFC’s reputation and led to a reevaluation of its economic mission. With a strong postwar economy, many questioned the need for continued federal intervention in capital markets. Opponents of the agency also feared that it would contribute to inflation by raising aggregate demand and argued that private financial markets allocated capital more effectively without governmental interference.

As the need for the RFC diminished and as its political influence eroded after the taint of scandal, many who had been among the agency’s most vocal supporters called for its termination. The RFC was formally dissolved in 1953 by the Small Business Administration Act, although the Federal National Mortgage Association and the Export-Import Bank survived as independent agencies. Throughout the twentieth century, the Export-Import Bank continued to provide loan guarantees to exporters of American products.

The Small Business Administration represented an evolutionary concept of governmental intervention by providing direct loans and loan guarantees to small firms to assist them in competing with larger enterprises. This more limited role retained the original RFC concept of providing access to capital for companies in need, although it restricted the government’s ability to influence broad sectors of the economy unduly. Even this level of government intervention was controversial, however. Despite occasional calls for a revival of the RFC or the establishment of a similar organization to assist distressed sectors of the economy, prevailing economic theory at the beginning of the twenty-first century favors market allocation over governmental control of capital markets. Reconstruction Finance Corporation Great Depression;New Deal New Deal;Reconstruction Finance Corporation Banking;Reconstruction Finance Corporation

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Bickley, James M. “An Evaluation of the Reconstruction Finance Corporation with Implications for Current Capital Needs of the Steel Industry.” In New Tools for Economic Development: The Enterprise Zone, Development Bank, and RFC, edited by George Sternlieb and David Listokin. Piscataway, N.J.: Rutgers University Press, 1981. Brief, highly informative overview of the background and achievements of the RFC. Provides analysis of the agency’s strengths and weaknesses within the context of government stimulus of economic growth.
  • citation-type="booksimple"

    xlink:type="simple">Ellis, Edward Robb. A Nation in Torment: The Great American Depression, 1929-1939. 1970. Reprint. New York: Kodansha International, 1995. Journalistic account of the Depression includes a chapter devoted to the Reconstruction Finance Corporation.
  • citation-type="booksimple"

    xlink:type="simple">Gup, Benton E., ed. Too Big to Fail: Policies and Practices in Government Bailouts. Westport, Conn.: Praeger, 2004. Collection of essays includes discussion of the RFC, in particular the agency’s assistance to the railroad industry during the Depression.
  • citation-type="booksimple"

    xlink:type="simple">Himmelberg, Robert F. The Great Depression and the New Deal. Westport, Conn.: Greenwood Press, 2000. Discusses the causes of the Depression and the actions taken in the United States to alleviate its effects, including establishment of the RFC. Features chronology, glossary, and index.
  • citation-type="booksimple"

    xlink:type="simple">Jones, Jesse H. Fifty Billion Dollars: My Thirteen Years with the RFC, 1932-1945. 1951. Reprint. New York: Da Capo Press, 1975. Personal recollections of the second chairman of the RFC, who was appointed to the board of directors at the time the agency was created. Presents a detailed account of the RFC’s accomplishments. Especially informative regarding the personalities and political infighting at the RFC during a crucial period in its history.
  • citation-type="booksimple"

    xlink:type="simple">Olson, James S. Herbert Hoover and the Reconstruction Finance Corporation, 1931-1933. Ames: Iowa State University Press, 1977. One of the best works available on the early years of the RFC. Presents a balanced view of the agency, its mission, and its accomplishments as well as a detailed account of the congressional battles surrounding the agency’s creation.
  • citation-type="booksimple"

    xlink:type="simple">_______. Saving Capitalism: The Reconstruction Finance Corporation and the New Deal, 1933-1940. Princeton, N.J.: Princeton University Press, 1988. Takes up where Olson’s earlier study of the RFC (cited above) leaves off. Traces the agency’s involvement in financing numerous New Deal programs.
  • citation-type="booksimple"

    xlink:type="simple">Pusey, Merlo J. Eugene Meyer. New York: Alfred A. Knopf, 1974. Discusses the full span of Meyer’s life and delineates the role he played in suggesting and designing the RFC. Although a political conservative, Meyer had no illusions regarding the problems in the U.S. economy that the RFC was created to correct.
  • citation-type="booksimple"

    xlink:type="simple">Studenski, Paul, and Herman Edward Krooss. Financial History of the United States: Fiscal, Monetary, Banking, and Tariff, Including Financial Administration and State and Local Finance. 2d ed. 1963. Reprint. New York: Beard Books, 2003. An important general reference for financial research. Provides fundamental information as well as analysis of financial institutions and their place in the economic history of the United States.

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