Part four of the series Funding Infrastructure the American System Way
By Nancy Spannaus
April 22, 2021—From rural electrification to roads, water mains, flood control, and national parks (just to name a few), there are few elements of our core national infrastructure today which were not built under the administration of President Franklin D. Roosevelt. For while FDR put his major public emphasis on providing jobs and lifting people out of poverty, he well understood that enduring prosperity depended upon investment in creating and modernizing the physical infrastructure of the country.
But, an individual might ask, where did he find the money to build bridges and massive dams in the midst of a Depression? To FDR and his American System advisers the answer was clear: Federal credit.
In addition to direct budget allocations to areas of immediate need, the FDR administration relied on institutions which functioned as banks and corporations which generated income for the Federal government, as well as performing their role to expand the economy. The most prominent of these was the Reconstruction Finance Corporation (RFC), which became the biggest bank in terms of the volume of lending in the United States, and ultimately generated profits for the U.S. Treasury!
FDR used a different model of infrastructure development in establishing the Tennessee Valley Authority (TVA), the spectacularly successful vehicle for lifting the seven-state Tennessee River Valley out of abject poverty. Using Federal grants and bond-issuing authority, the TVA has “paid off” even in direct financial terms, through revenues from sales of power, fertilizer, etc.
The scope of the accomplishments of both of these institutions is far too enormous to cover in this article, but in the remainder, I will summarize leading aspects of their operations that are relevant to our problem today: How will we fund the trillions in infrastructure development we so desperately need?
The Reconstruction Finance Corporation
FDR inherited the RFC from President Hoover, but immediately changed its approach. The Emergency Banking Act of 1933, the very first piece of legislation passed by the 73rd Congress to deal with the financial breakdown, included a provision expanding the RFC’s activities to permit the purchase of stock in ailing banks and companies. This shift expanded banks’ abilities to lend, rather than just providing bailout monies to pay off their debt. Over time, the RFC’s investments expanded further to the purchase of municipal bonds, as well as aid in capitalizing programs such as the Homeowners Loan Corporation, the Rural Electrification Administration, the Works Progress Administration, and a host of wartime agencies.
The RFC had begun with a Congressional appropriation of half a billion dollars in government bonds under President Hoover, but it had unlimited authority to borrow funds from the U.S. Treasury, and could also issue its own notes to the public. But while some RFC spending was mandated by federal legislation, the corporation also had the ability to carry on its loan operations without prior Congressional approval for each venture. And the payments made on those loans were available to be recycled right back into the economy through other loans.
RFC chairman Jesse Jones, an anti-Wall Street banker from Houston, took an aggressive stand toward the nation’s banks, insisting that they help restart the economy by lending into the business community. But when the banks dragged their feet, Jones supported legislation which authorized the RFC to loan directly to businesses and industry. This made the RFC the nation’s banker of last resort. The authorization was passed in 1934.
The loans were not hand-outs. Recipients had to show they had been rejected by a bank and that they were credit-worthy; the loans were limited to half a million dollars and could last up to five years. (Jones wanted higher limits on both.) After a slow start, the program did pick up steam. In 1939, when the RFC was reauthorized and began in earnest funding the war buildup, Chairman Jones issued an annual report covering the Corporation’s operations since its inception. Jones’ biographer Steven Fenberg described the report as follows:
The report stated that the RFC had received authorizations of $13 billion … and that $3 billion … had been distributed ‘by direction of congress in which our directors had no discretion.’ The RFC itself had disbursed $7.2 billion…, and of that amount $5.3 billion …, or seventy-four percent, had been repaid.”[1]
RFC operations dramatically expanded as the mobilization for World War II became the focus of the nation. The corporation set up a plethora of agencies which organized and supported the nation’s defense capabilities, including building plants, procuring raw materials, and the like.
By the time of its retirement in 1957, the RFC had lent or invested up to $50 billion into the nation’s economy, including establishing long-lasting institutions such as the Commodity Credit Corporation, the Export-Import Bank, the Rural Electrification Administration (REA), and the Federal Housing Administration. This came on top of its support for the infrastructure-building by the Works Progress Administration, the Civilian Conservation Corps, and the Public Works Administration, which altogether launched more than 45,000 projects in the five basic categories of infrastructure: water, power, transportation, health, and education. Many of the structures his programs built are still being used throughout the nation, some 80 years later.
While largely overlooked today, the RFC’s activities touched the lives of every American in its investment for the common good.
Many have asked, did the RFC make a profit? As the corporation’s final report noted, that’s the wrong question. Its mandate was to deal with the national emergencies (the Depression and the war), and to aid in restoring the nation’s economy, not to operate strictly as a business enterprise. Yet, the report added, “Taken as a whole, the accounting records of the lending programs show that interest income and other revenues exceeded losses and expenses.”
Viewed from the standpoint of its overall societal and social benefit, of course, the RFC’s contribution clearly not only profited the nation, but created the basis for expanded wealth. Indeed, thanks to FDR’s extensive infrastructure investments, especially the RFC-funded REA, Total Factor Productivity of the U.S. economy grew so rapidly starting in the FDR years that the era was called the “golden age” of U.S. productivity.
The Tennessee Valley Authority
Like the RFC, the Tennessee Valley Authority was set up as a corporation owned by the Federal government but operated by a Board of Directors of private individuals. Its mandate was to provide for the “proper use, conservation and development of the natural resources of the Tennessee River drainage basin and its adjoining territory for the general social and economic welfare of the Nation.”[2] Included was to be the completion of the Muscle Shoals hydroelectric dam/nitrates project which had been begun in the World War I period, but never completed.
The Act creating the TVA gave the new agency sweeping powers and charged it with responsibilities related to national defense, agricultural and industrial development, flood control, and navigation, including for the Mississippi River Basin. The TVA Board was authorized to contract with commercial producers for the production of fertilizers, to arrange with farmers for large-scale practical use of new fertilizer; and to produce, distribute, and sell electric power. The board was initially authorized to issue bonds for $50 million, which were “fully and unconditionally guaranteed both as to interest and principal by the United States, [for] the economic and social well-being of the people”[3] living in the Tennessee Valley. (This limit was raised several times later.)
The task which the TVA faced was daunting indeed. In 1933, only three out of every 100 households in the region had electricity. The average farmer’s income was one third of the national average of $1,835. More than 300,000 acres of farmland had been destroyed, and 4.5 million acres were on the decline, because farmers were growing soil-depleting cash crops—particularly cotton and tobacco. Erosion was spreading, driven by deforestation, planting on hillsides, and the stripping of nutrients from the soil. More than a million acres of topsoil had disappeared.
Malaria was endemic in more than half of the Valley area, with infection rates of up to 60 percent in some regions, affecting up to 30 percent of the total population. There were 7.6 deaths per 100,000 population from typhoid and 79.4 deaths per 100,000 population from tuberculosis. Smallpox was still a threat. The average expenditure per child for education was a measly $23.
All of these conditions were exacerbated by the uncontrolled flooding which frequently occurred on the Tennessee River and its tributaries. Thus, the number one priority of the TVA was to construct a series of dams, which would control the water flow to prevent floods, aid navigation, provide for irrigation, and run hydro-electric dams to produce electricity.
The TVA went right to work building the Norris Dam at Muscle Shoals and completed 20 dams in its first 20 years. Within a few years it was selling the electricity from the power plants at a low and affordable price (as mandated by the Act), thus creating a steady income stream. Over the decades the income from the power sales, and those of the fertilizer plants, permitted it to pay down monies received from the Federal government, as well as much of its capital.
The TVA’s bond sales were often to the Treasury and the RFC. These supplemented monies appropriated by Congress, and the revenues received from its sale of power and fertilizer, which by statute were permitted to be utilized for reinvestment in its operations, rather than sent into the Federal Treasury. Since 1959, the Authority has been self-sustaining, and it continues to pay millions into the Treasury each year on its bonded debt.
Of course, as in the case of the RFC, the “cost-benefit” of the TVA, with its extensive power production, fertilizer production, and water management, cannot be captured on the accountants’ balance sheet per se. In addition to the region’s 10 million inhabitants, the whole nation has benefited from the economic demand generated outside the area, and the role the TVA’s operations played in enabling the production of war materiel needed for World War II. I would add to this the millions of lives enhanced and saved through upgraded living conditions.
Lessons Learned?
There are two aspects of these two FDR programs which we could, and should, immediately apply today. The first is their comprehensive vision and scope, spanning broad regions and lengthy time spans. They represented investment for our posterity, benefitting the entire nation, as our Constitution’s Preamble commands.
As President Kennedy said at the 30th anniversary celebration at Muscle Shoals in April 1963, President Kennedy spoke at Muscle Shoals on May 18, 1963, the TVA’s 30th anniversary. “Let us all resolve that we, too, in our time, 30 years later, will, ourselves, build a better Nation for ‘generations yet unborn.’”
The second lesson is the RFC’s and TVA’s use of Federal government credit to carry out their investments, combined with a management system that escapes the unreliable cycle of Congressional appropriations. Investment in a power plant, scheduled to function decades into the future, cannot be subjected to the stop-and-go process which dominates Congress. FDR understood this well, with the result that the legislation permitted both agencies to reinvest their own proceeds, to the benefit of all involved.
Both of these characteristics are included, and amplified, in the proposal for a $5 trillion National Infrastructure Bank now being promoted by the Coalition for a National Infrastructure Bank. It remains to be seen whether they can be incorporated into legislation on infrastructure spending now being discussed in Congress.
Many groups are currently claiming the mantle of FDR, but their programs so far lack these crucial qualities. Spread the word on Hamilton’s American System method, and let’s get it done.
[1] Steven Fenberg, Unprecedented Power, Jesse Jones, Capitalism, and the Common Good, Houston Endowment, Inc., 2011, p. 327. The ellipses remove the translation of 1939 dollars into 2011 dollars, which showed the figures increased basically by a factor of 15. Fenberg’s book was one of my major sources for the operations of the RFC.
[2] This quotation comes from FDR’s April 10, 1933 announcement of his intent to submit legislation establishing the TVA.
[3] The quote is from the legislation, cited in the article “Roosevelt’s TVA: The Development Program that Transformed a Region and Inspired the World,” by Marsha Freeman, published in the Summer 2011 edition of 21st Century Science & Technology. That article is a major source for this post.
Tags: American System, FDR, Federal bonds, infrastructure, infrastructure bank, Nancy Spannaus, Reconstruction Finance Corporation, Tennessee Valley Authority