Reconstruction Finance Corporation

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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 Roosevelt Administration, handling the Great Depression in the United States and setting up the relief programs that were taken over by the New Deal in 1933.[1]

The 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). Its operations were scaled back in 1936, averaging about $350 million a year. On the eve of World War Two, it was greatly expanded to build munitions factories and dispersed $1.8 billion in 1941. Overall, the RFC loaned $9.465 billion between 1932 and 1941. The RFC was dismantled between 1947 and 1953, its various operations given to other offices of the executive branch.[2]

Hoover Agency

By the time the 72d Congress was seated in December 1931, the Democratic Party had achieved a one seat majority in the House of Representatives while the Republicans maintained a one-seat majority in the Senate. These slim margin, however, were insufficient to thwart a will for a more active approach to dealing with the Great Depression. President Hoover also was, by this time, moving from his individualistic approach of 1930 to more state action.

Hoover recommended the establishment of a Reconstruction Finance Board at the beginning of the 72d Congress in January 1932. Congress promptly passed the measure. Hoover appointed M. Eugene Myers, Paul Bestor, and Charles G. Dawes to head the organization. The RFC was authorized to loan up to $500 million (plus an additional $2 billion if necessary) in emergency funds to banks, railroads, life insurance companies, building-and-loan societies, and farm mortgage associations. The purpose of the loan program was "pump-priming." The idea was that if banks and other lenders had money to lend, it would stimulate business to expand and put Americans back to work.

Within the first six months of its operations, the RFC loaned out $1.2 billions. But in spite of these loans, the economy did not recover. Banks in particular, seemed to ignore the emergency altogether, using RFC loans to bolster their reserves instead of making credit available to business that would have stimulated the economy. The board also seemed to be rather biased in its approval of loans; favoritism was a particular charge against the RFC. By June of 1932, the original board resigned. Ill-health of some of its members was a particular reason, but overall the board failed to inspire the confidence of the American people.

In July 1932, Congress reorganized the RFC with the Emergency Relief and Reconstruction Act to permit it to loan directly to farmers, states, and public works projects. In this reorganization, Hoover appointed Atlee Pomerene of Ohio to head the agency. Hoover's choice in Pomerene was grounded in his need to find a man who had the ability head the loan program, was nationally respected, and available.[3]

Overall, the RFC during Hoover's Administration was largely ineffective. As part of his individualistic approach, Hoover hoped that the RFC would demonstrate confidence in the economy leading bankers to begin lending again and stimulate its own recovery. The RFC board under both Meyer and Pomerene was composed of conservative bankers who placed high interest rates on RFC loans (thus making them less desirable) in order not to compete with commercial banks. Also, they demanded high collateral values, which meant, ironically, that the businesses most likely to receive RFC loans were those businesses which could demonstrate that they did not need RFC loans. As a instrument intended to deal with a financial emergency, those firms needing emergency funds were least likely to get them because, according to conservative banking principles, they were at risk of not repaying the loans. Furthermore, this approach of pump-priming, an attempt to make more money available to business by underwriting banking, did nothing to address the immediate problems of unemployment.

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. In the publication of the loan recipients, the charges of favoritism were born out as it was shown that Charles G. Dawes's bank received a $90 million RFC loan shortly after Dawes left the board.

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.[4]. 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. [5]

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.[6]

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.


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. [7]

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.[8]


  • 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


  1. Sprinkel (1952).
  2. Sprinkel (1952).
  3. Shriver (1982)
  4. Olson 1988
  5. Annmarie Hauck Walsh, The Public's Business: The Politics and Practices of Government Corporations. (1978) p. 28, 212
  6. Herbert and Bisio (1985)
  7. Douglas Knerr, Suburban Steel: The Magnificent Failure of the Lustron Corporation, 1945-1951. 2004.
  8. See [1]