In January 1932, the United States was in the midst of the longest and deepest economic downturn in its history, which began with a stock market crash in 1929 and continued with a series of regional banking panics through 1930 and 1931. The Annual Report of the Federal Reserve Board noted that 1931 “was a year of continued depression in business, of reduced employment, and of decline in values.” Bank suspensions increased, employment slowed, and many Americans were destitute. At the time, there was no federal agency in existence that could make large loans to depressed sectors of the economy and support small banks in need of loans to manage daily operation.
Eugene Meyer[1] was Chairman (called “governor” before 1935) of the Federal Reserve Board during that time. Meyer had served as the head of the War Finance Corporation during World War I, a government corporation that supported industries essential for war efforts and the banking institutions that aided those industries. From 1927-1929, Meyer served as chairman of the Federal Farm Loan Board and was then tapped by President Hoover to lead the Federal Reserve Board in 1930. Building on his earlier experience, Meyer helped develop the lending structure needed to get the country back on the road to rebuilding. He suggested the Reconstruction Finance Corporation (RFC), modeled on the War Finance Corporation. The agency would loan to banks and focus on serving state-chartered banks and banks in small, rural areas that were not part of the Federal Reserve System.
Testifying before Congressional committees in December 1931, Meyer insisted that the proposed organization would “be a strong influence in restoring confidence throughout the nation and in helping banks to resume their normal functions by relieving them of frozen assets.”[2] President Hoover asked Congress to pass the Reconstruction Finance Corporation Act of 1932, which it did with broad partisan support. The act was signed into law on January 22, 1932, and Hoover appointed Meyer as the first chairman of the board of the RFC in February 1932, a position he would hold for six months.
With the passage of the Banking Act of 1932, signed on February 27, the Federal Reserve’s lending powers were broadened: It now had the power to make national policy to mitigate problems with the economy. At the time, Meyer was both the Chairman of the Federal Reserve and chairman of the RFC board. As such, between 1932 and 1933, the RFC operated as the discount lending arm of the Federal Reserve,[3] but its purpose and functions changed over time. Loans were extended to bail out otherwise solvent institutions, including banks, railroads, and insurance companies. An amendment was passed in July 1932, the Emergency Relief and Construction Act, which also allowed the RFC to both create a relief program to aid in unemployment and provide loans to state and municipal governments to finance local projects, such as buildings, bridges, and waterways. In March of 1933, the powers of the RFC were expanded to allow it to recapitalize banks through purchases of preferred stock. The passage of the New Deal in 1933 further expanded the power of the RFC by allowing it to extend direct loans for agriculture, housing, exports, businesses, and disaster relief; and the Emergency Banking Relief Act allowed the RFC to invest directly in struggling financial institutions. The RFC’s powers were expanded further still during World War II, when President Roosevelt converted it from a recovery agency to a wartime agency. The RFC was used to fund the development of synthetic rubber and tin, and after the war it managed the storage and sales of surplus aircraft.
The loans the RFC provided—which followed conservative guidelines, carried high interest rates, and had rigid collateral requirements—were no longer in demand after World War II, and Congress abolished the RFC in 1953 and began liquidating its assets. Originally envisioned as a temporary agency, the RFC fulfilled several purposes over the years, and echoes of its financial stabilization functions, such as the Federal Deposit Insurance Corporation (FDIC) and the Export-Import Bank of the United States, remain in service today.
[1] Find out more about Meyer’s life and work: Eugene I. Meyer.
[2] New York Times. “Hearings Are Begun on Credit Pool Bill.” December 19, 1931.
[3] Michael Gou, Gary Richardson, Alejandro Komai and Daniel Park. “Reconstruction Finance Corporation Act.” Federal Reserve History, November 22, 2013 (revised January 2022).
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