Reconstruction Finance Corporation
The Reconstruction Finance Corporation (RFC) was established in January 1932 during President Herbert Hoover's administration as a response to the banking crisis of the Great Depression. Initially created to provide short-term loans to banks and financial institutions, the RFC aimed to prevent defaults and stabilize the banking sector. With an initial capitalization of about $2 billion, the RFC quickly began operations and, despite skepticism from the public regarding its intentions, it played a key role in providing financial assistance across various states.
When Franklin D. Roosevelt took office, he transformed the RFC into a major vehicle for economic recovery, expanding its mandate to include investments in various sectors beyond banking. Under the leadership of Jesse H. Jones, the RFC supported numerous New Deal initiatives and became a significant investor in the American economy, ultimately making over $10 billion in investments by the mid-1930s. While it faced criticism and calls for oversight, the RFC showed substantial success, even returning profits to the Treasury by 1936.
Despite plans for dissolution, the RFC remained operational to address ongoing economic challenges, contributing to the country's preparation for World War II. Its emergence marked a pivotal shift in federal involvement in the economy, establishing a precedent for future government intervention to promote economic stability and growth.
Reconstruction Finance Corporation
Identification Federal government agency that loaned money to banks and financed economic stimulus programs
Date Established on January 22, 1932
The Reconstruction Finance Corporation (RFC) provided a vehicle for two U.S. presidents to stimulate the economy during the Great Depression by extending loans to banks and underwriting projects that would generate employment.
The RFC was born out of frustration during the administration of President Herbert Hoover, who in 1931 had run out of options for slowing down the apparent meltdown of the U.S. banking industry. When efforts to get the private sector to initiate its own recovery program failed, Hoover reluctantly agreed to the creation of the RFC to make money available to banks so they could meet obligations rather than go into default. Modeled on the War Finance Corporation, which had made loans to businesses during World War I, the program was created in January, 1932, with a capitalization of approximately $2 billion to provide short-term loans to financial institutions that had the wherewithal to make repayments. The $2 billion was considered a revolving fund, continually available for new loans. The RFC began making loans almost immediately and experienced some modest success during its first year of operation. Hoover eventually agreed to let the RFC make capital loans for self-liquidating projects. Within a short time, institutions and businesses in nearly every state received some assistance. However, public distrust of the RFC’s activities and the widespread belief that its program was simply a maneuver to bail out the rich made the agency a political nightmare. Hoover agreed in late 1932 to close it down. Before he could do so, however, he was succeeded in office by Franklin D. Roosevelt.
Roosevelt immediately set about transforming the RFC into one of the principal agencies for economic recovery. The president considered the RFC to be a tool for reviving commercial credit through a form of state capitalism, in which the government directs and underwrites private economic activity. Under the Banking Act of 1933, the RFC was given authority to invest directly in private banks. Roosevelt also decided he could use the revolving fund as a means of helping sectors of the economy other than banking toward recovery. He and the Democratic Congress thought of the RFC as a vehicle for underwriting capital projects without raising taxes. The RFC already controlled its initial appropriation, which did not have to be returned to the Treasury, at least not until authority for the agency expired. Anticipated repayments with interest could keep the fund solvent without the need for Congress to make additional appropriations.
Roosevelt appointed Texas businessman Jesse H. Jones to head the RFC. Under his leadership, the agency expanded its portfolio to make loans directly to a number of businesses. Where Hoover had been reluctant to see the RFC compete with the private sector in making loans or investments, Roosevelt and Jones were not averse to circumventing reluctant congressmen or private financiers, lending money directly to individual businesses whose capital projects showed promise of increasing employment. As a result, many New Deal initiatives were financed by RFC loans. The president also used the RFC to buy up gold stocks, thereby manipulating the value of U.S. currency and further stimulating economic growth. The RFC also invested in the Export-Import Bank of Washington, D.C., to stimulate international business opportunities for American companies.
Within three years, a program initially targeted to inject no more than $2 billion in short-term loans into the economy had made all varieties of investments totaling more than $10 billion. The RFC became the largest investor in the American economy. When the agency was renewed by Congress in 1935, it was given increased authority to make investments in, or long-term loans to, many new categories of business, including the real estate and mortgage industries. The RFC attempted to save American railroads and assisted municipalities that were in dire straits. While not everyone in Roosevelt’s administration was happy with the operations of the RFC, the agency continued operating virtually independent of any oversight from Congress or Roosevelt’s cabinet. In 1936, the RFC began returning a profit to the Treasury. Although Roosevelt agreed in 1937 to shut down the RFC because it seemed to have served its purpose, a recession that year forced him to keep it alive. As a result, in 1940, it was available to underwrite many of Roosevelt’s programs that prepared the United States for World War II.
Impact
Despite a shaky start under Hoover, the RFC proved to be a significant engine for change during the Great Depression. Furthermore, while not every initiative undertaken by the agency was successful, its activities proved to be the first major effort by the federal government to take an active role in shaping the American economy. Once the RFC had demonstrated its effectiveness, it was impossible for future American political leaders to back away from direct intervention to influence the economic health of the country.
Bibliography
Olson, James S. Herbert Hoover and the Reconstruction Finance Corporation, 1931-1933. Ames: Iowa State University Press, 1977. Explains the difficulties Hoover had in creating and supporting the RFC; outlines the many political problems he experienced in trying to use it to stem some of the problems experienced by financial institutions after the Wall Street crash of 1929.
‗‗‗‗‗‗‗. Saving Capitalism: The Reconstruction Finance Corporation and the New Deal, 1933-1940. Princeton, N.J.: Princeton University Press, 1988. Examines the activities of the RFC during the Roosevelt administration. Describes the RFC as a means of generating economic growth and creating jobs across the country.
Rosen, Eliot. Roosevelt, The Great Depression, and the Economics of Recovery. Charlottesville: University of Virginia Press, 2005. Briefly describes how Roosevelt used the RFC to stimulate the economy and reverse the effects of the Great Depression.