By Nancy Spannaus
Aug. 10, 2016—When President Franklin Delano Roosevelt took action within his first 100 days to control the U.S. economy from the marauding speculating bankers who had brought it to its knees, he knew that stopping financial crime was not going to be enough. Americans needed the opportunity to go back to work—and to do that, there needed to be a reliable source of credit to industry, agriculture, and public entities to permit that to happen. So once the Banking Act and Glass-Steagall were passed, much more had to be done.
Contrary to the myths that you hear regularly today, FDR did not ram through allocations of billions of dollars for welfare programs through the Congress in order to accomplish this task. Instead, he chose to utilize an instrument which had already been set up by his predecessor Herbert Hoover, the Reconstruction Finance Corporation (RFC), and to turn that institution into an approximation of a national bank.
Under FDR, the RFC issued billions of dollars in credit to any corporation, industry, agriculturalist, or government entity to carry out productive activity, if there was a reasonable assurance that the loan would be repaid. Thus, while the major money-centered banks in Wall Street, and the banks dependent upon them around the country, were unwilling or unable to issue credit to restart the economy, the RFC did so with gusto. Over the course of its lifespan, from 1932 to 1957, the RFC issued $54 billion dollars in credit.
The RFC operated primarily by borrowing from the U.S. Treasury according to limits set by Congress. All loans made through the RFC were to be repaid, and, according to official government reports, the RFC in aggregate stayed in the black. But, as the Federal Reserve itself points out in its review of the history of the RFC, the purpose of the institution was not to “make a profit,” but to restart industry and agriculture—to save and revitalize whole sectors of the U.S. economy. Effectively, the institution functioned in a way very similar to the Banks of the United States, providing directed credit on non-restrictive terms. The payback came in the productivity of the economy as a whole.
Over the course of the RFC’s history, its purview for issuing loans on the basis of monies it borrowed from the Treasury, constantly expanded. In June 1934 it was authorized to loan directly to business enterprises. In January of 1935 it was authorized to subscribe or make loans for mortgages, thus stemming massive waves of foreclosures. It made crop loans as well. In addition, the RFC made loans to government entities, such as the Works Progress Administration (the agency which built many of the great infrastructure projects launched during FDR’s administration), and—in the largest jump of all—in 1940, issued massive amounts of credit (approximately $23 billion) into what was to become the world’s most advanced defense industry, preparing for victory over the Nazis in World War II.
To sum it up, during FDR’s presidency, the RFC extended more new credit than the volume of new loans extended by the entire U.S. commercial banking system during the same period. As those loans were paid back, the monies were lent again. In addition to the direct monies lent for projects and infrastructure, there was a multiplier effect within the industries which had to supply the materials for their completion.
Of course, the RFC often co-financed projects with banks and other institutions—and for them to participate, they had to be cleaned up of the speculative garbage on their books. First Glass-Steagall, then credit – that’s the road to recovery.