Reconstruction Finance Corporation

The Reconstruction Finance Corporation (RFC) was an independent agency of the United States government chartered by Congress during the administration of Herbert Hoover in 1932. It replaced the unsuccessful National Credit Corporation; RFC was modeled after the War Finance Corporation of World War I. The agency gave $2 billion in aid to state and local governments and made loans to banks, railroads, farm mortgage associations, and other businesses. The loans were nearly all repaid. It was continued by the New Deal and played a major role in handling the Great Depression in the United States and setting up the relief programs that were taken over by the New Deal in 1933.

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.

Hoover agency

Hoover appointed Atlee Pomerene of Ohio to head the agency in July 1932. Hoover's reasons for his surprising reorganization of the RFC included: the broken health and resignations of M. Eugene Myers, Paul Bestor, and Charles Gates Dawes; the failure of banks to perform their duties to their clientèle or to aid American industry; the country's general lack of confidence in the current board; and Hoover's inability to find any other man who had the ability and was both nationally respected and available.

The RFC was bogged down in bureaucracy and failed to disperse many of its funds. By concentrating on banking, it was unable to stem the accelerating growth of mass unemployment before 1933. Butkiewicz (1995) shows that the RFC initially succeeded in reducing bank failures, but the publication of the names of the recipients of loans beginning in August 1932 (at the demand of Congress) significantly reduced the effectiveness of its loans to banks because it appeared that political considerations had motivated certain loans. Partisan politics thwarted the RFC's efforts, though in 1932 monetary conditions improved because the RFC slowed the decline in the money supply.

New Deal agency

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. 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. Lauchlin Currie, formerly of the Federal Reserve Board staff, was the deputy administrator to Crowley.

The RFC established eight 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.

Postwar

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.

Bibliography

• 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
• Herbert, Vernon and Attilio Bisio. Synthetic Rubber: A Project That Had to Succeed 1985 online edition
• 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.
• Shriver, Phillip R. "A Hoover Vignette," Ohio History 1982 91: 74-82. ISSN: 0030-0934
• Beryl Wayne Sprinkel. "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
• White, Gerald Taylor, Billions for Defense: Government Financing by the Defense Plant Corporation During World War II (1980)

• video: Eric Strange, producer. "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.

External links

• Article on the RFC from EH.NET's Encyclopedia
• Oral History Interview with Hubert F. Havlik, Truman Presidential Library, June 20, 1973.
• Robert Higgs, "From Wartime Expedient to Permanent Pork Barrel: WFC to RFC to SBA" The Freeman October 1, 2004; libertarian critique

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