Reconstruction Finance Corp. (RFC)

What Was the Reconstruction Finance Corporation (RFC)?

The Reconstruction Finance Corp. (RFC) was an agency authorized by the U.S. government to loan money to assist the nation's ailing banks after the stock market crash of 1929 and during the Great Depression that followed.

Congress created the RFC in 1932 with a limited mandate to issue emergency loans to banks, railroads, and farmers threatened with insolvency. Its scope quickly expanded and it soon began lending money to state and local governments to finance public infrastructure projects. It outlived the Great Depression and later helped finance industries that were key to the nation's role in World War II.

The RFC was not fully abolished until 1957.

Key Takeaways

  • The Reconstruction Finance Corp. was created to stabilize the nation's banks, railroad industry, and farms during the economic turmoil that marked the early years of the Great Depression.
  • Its role expanded greatly, especially during the presidency of Franklin Roosevelt, as it began funding local infrastructure projects and lending money to small businesses.
  • Later, the RFC had an important role in funding the nation's preparation for its entrance into World War II.
  • The RFC's unusual status as a quasi-independent agency made it useful to President Roosevelt, who could funnel money to public projects through it without Congressional oversight.
  • The RFC was scaled down and finally abolished in the years after World War II.

Understanding the Reconstruction Finance Corp. (RFC)

Congress created the RFC primarily to shore up the nation's banks, which were collapsing under the strain of panic withdrawals from their customers as the Great Depression took hold.

It was intended to stay in business for only 10 years, but the RFC continued and even expanded throughout the 1930s and the 1940s.

Soon after its creation, the RFC expanded its lending activities beyond the nation's banks, railroads, and farms. It ultimately made loans to state and local governments as well as small businesses. When World War II broke out, the RFC developed eight subsidiaries to focus on financing industrial production related to the nation's wartime needs.

History of the Reconstruction Finance Corp. (RFC)

The Emergency Relief Act, created in the summer of 1932, broadened the agency's scope and power. It allowed the RFC to extend loans to local and state public works as well as farmers and small businesses.

In its initial years, under President Herbert Hoover, the RFC made little use of its expanded powers. After Franklin D. Roosevelt took office and the New Deal went into effect, the agency sought more vigorously to support the recovery effort.

The RFC expanded even further during World War II to provide financing for the construction and operation of war plants and even loans to Allied foreign governments.

The original concept was that the RFC would be a non-political, autonomous agency. During its earliest years, the concept held.

However, as the RFC continually expanded and assumed the hefty responsibility of doling out massive sums of money, it became more subject to accusations of political favoritism in its decisions on loans.

The Federal Deposit Insurance Corp. (FDIC), which protects bank deposits, and the Securities & Exchange Commission (SEC), which regulates the financial markets, are both products of Roosevelt-era reforms.

Beginnings

The bank panic was one of the symptoms of the Great Depression, which began with the collapse of the stock market in 1929 and would continue until 1939. At the time, America had more than 24,000 independent banks, most of them serving small communities and rural areas.

One bank after another collapsed as their customers lined up and withdrew their savings until the vaults were empty and the banks closed. The remaining customers lost their life savings. The panic spread from town to town.

The Federal Reserve had been created in 1913 specifically to prevent this type of crisis by providing emergency loans to banks. But only nationally-chartered banks were required to be Fed members. State-chartered banks, including most of those small local banks, were not members.

The Hoover Administration

In 1932, the Reconstruction Finance Corp. was created by Congress with the backing of President Herbert Hoover. Its mission was to provide emergency loans to three key sectors of the economy: banks, railroads, and farm crops.

The U.S. Treasury initially provided $500 million in funds to be distributed by the RFC.

The New Deal

The scope of the RFC and its funding expanded enormously after the election of President Franklin D. Roosevelt. Its independence was a key benefit of the RFC, from the politician's viewpoint: Its spending did not require Congressional authorization and did not appear in the federal budget.

The agency began to loan money to state and local governments to fund state and local public projects and to pay for relief programs for the unemployed. Assistance to cash-strapped farmers was greatly increased.

As the Great Depression continued, many homeowners defaulted on their mortgages. The banks, fearing more defaults, made it even more difficult to obtain a mortgage. In yet another expansion of RFC powers, it was empowered to create the Federal National Mortgage Association to guarantee mortgages. That association still exists and is known as Fannie Mae.

The Small Business Administration was created to fill a gap left by the dissolution of the RFC. Its creation acknowledged the importance of small businesses to the U.S. economy and the difficulty of their owners in getting financing through the private banking system.

World War II

By 1940, U.S. involvement in World War II appeared inevitable. No fewer than eight subsidiaries were added to the RFC to finance the development of materials necessary to the war and to replace imported materials that had become unobtainable.

End of the Reconstruction Finance Corp.

Post-depression and post-war, the work of the RFC began to wind down.

In 1948, Congress began a series of investigations of political corruption within the RFC. One accusation was that the RFC had granted a loan to a customer of Boeing Corp. in return for Boeing's support of President Harry S. Truman.

The Senate Committee on Banking and Currency mandated an immediate reorganization, leading to a restructuring of the RFC in 1952.

Despite the effort to revamp the agency, accusations of mismanagement continued to surround the RFC. Just one year after the restructuring, Congress passed the RFC Liquidation Act.

The agency was defunded and its remaining functions were slowly transferred to other agencies. The Small Business Administration was created in part to fill a void in government lending to small businesses that the RFC's disappearance created.

In 1957, the all-but-defunct RFC was dismantled entirely.

Economic Review of the Reconstruction Finance Corp.

The Reconstruction Finance Corp. filled the role of lender of last resort that in later years has been held by the Federal Reserve. Although it had been created in 1913, the Federal Reserve did not have the ability to lend to state-chartered banks. Nor did banks then have federal insurance to guarantee their deposits.

It was those state-chartered banks that served America's small businesses, farms, and consumers. And about 9,000 of them failed between 1930 and 1933, taking their depositors' money with them.

The RFC must get some credit for stopping that spiral of destruction and preventing the U.S. from an economic collapse. Its record, however, is still debated:

  • A near-fatal decision to publish the names of banks seeking loans from the RFC may have caused some to shun the agency's help for fear of causing panic withdrawals.
  • A requirement for collateral for some RFC loans may have deprived banks of much of the liquidity they could have used to stabilize and expand their operations.

What Was the Main Purpose of the Reconstruction Finance Corp.?

The original mandate of the Reconstruction Finance Corp. was to make emergency loans to keep American banks, railroads, and farms afloat through the worst of the Great Depression.

The scope of its activities expanded greatly over the years. During the Depression, it lent money to state and local governments to fund public works projects. During World War II, it took a key role in funding the expansion of U.S. military capability and even loaned money to foreign governments.


How Did the Reconstruction Finance Corp. Impact the Great Depression?

You think the 2008-2009 financial crisis was bad? The unemployment rate hit 24.9% during the Great Depression. Nearly half of the nation's banks failed. Industrial production dropped by half. The downturn lasted for 10 years.

The Reconstruction Finance Corp. seems to have kept some banks up and running through the worst years of the depression. It took on a far more substantial role after 1932 when President Roosevelt used it to funnel much-needed money into state and local government projects and ailing small businesses.

Who Benefitted From the Reconstruction Finance Corp.?

The Reconstruction Finance Corp. effectively was the discount lending arm of the Federal Reserve during the Great Depression, according to the Fed's own history. As such, it was able to supply a steady stream of cash to banks in the form of short-term loans. Those loans allowed the banks to cover their immediate obligations, even in dire circumstances such as a run on the bank or the bankruptcy of a major customer.

Article Sources
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  1. Federal Reserve Bank of St. Louis. "Final Report on the Reconstruction Finance Corporation," Page 2.

  2. Federal Reserve Bank of St. Louis. "Final Report on the Reconstruction Finance Corporation," Page 16.

  3. History. "Great Depression History."

  4. Economic History Association. "Reconstruction Finance Corporation."

  5. Federal Reserve Bank of St. Louis. "Final Report on the Reconstruction Finance Corporation," Pages 42-43.

  6. U.S. Government Publishing Office. "Congressional Record-Senate," Page 1660.

  7. Federal Reserve Bank of St. Louis. "Final Report on the Reconstruction Finance Corporation," Page 169.

  8. Federal Deposit Insurance Corp. "Background and Creation."

  9. Economic History Association. "Reconstruction Finance Corporation."

  10. Federal Reserve History. "Reconstruction Finance Corporation Act."

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