James Butkiewicz, University of Delaware


The Reconstruction Finance Corporation (RFC) was established during the Hoover administration with the primary objective of providing liquidity to, and restoring confidence in the banking system. The banking system experienced extensive pressure during the economic contraction of 1929-1933. During the contraction period, many banks had to suspend business operations and most of these ultimately failed. A number of these suspensions occurred during banking panics, when large numbers of depositors rushed to convert their deposits to cash from fear their bank might fail. Since this period was prior to the establishment of federal deposit insurance, bank depositors lost part or all of their deposits when their bank failed.

During its first thirteen months of operation, the RFC’s primary activity was to make loans to banks and financial institutions. During President Roosevelt’s New Deal, the RFC’s powers were expanded significantly. At various times, the RFC purchased bank preferred stock, made loans to assist agriculture, housing, exports, business, governments, and for disaster relief, and even purchased gold at the President’s direction in order to change the market price of gold. The scope of RFC activities was expanded further immediately before and during World War II. The RFC established or purchased, and funded, eight corporations that made important contributions to the war effort. After the war, the RFC’s activities were limited primarily to making loans to business. RFC lending ended in 1953, and the corporation ceased operations in 1957, when all remaining assets were transferred to other government agencies.

The Genesis of the Reconstruction Finance Corporation

The difficulties experienced by the American banking system were one of the defining characteristics of the Great Contraction of 1929-1933. During this period, the American banking system was comprised of a very large number of banks. At the end of December 1929, there were 24,633 banks in the United States. The vast majority of these banks were small, serving small towns and rural communities. These small banks were particularly susceptible to local economic difficulties, which could result in failure of the bank.

The Federal Reserve and Small Banks

The Federal Reserve System was created in 1913 to address the problem of periodic banking crises. The Fed had the ability to act as a lender of last resort, providing funds to banks during crises. While nationally chartered banks were required to join the Fed, state-chartered banks could join the Fed at their discretion. Most state-chartered banks chose not to join the Federal Reserve System. The majority of the small banks in rural communities were not Fed members. Thus, during crises, these banks were unable to seek assistance from the Fed, and the Fed felt no obligation to engage in a general expansion of credit to assist nonmember banks.

How Banking Panics Develop

At this time there was no federal deposit insurance system, so bank customers generally lost part or all of their deposits when their bank failed. Fear of failure sometimes caused people to panic. In a panic, bank customers attempt to immediately withdraw their funds. While banks hold enough cash for normal operations, they use most of their deposited funds to make loans and purchase interest-earning assets. In a panic, banks are forced to attempt to rapidly convert these assets to cash. Frequently, they are forced to sell assets at a loss to obtain cash quickly, or may be unable to sell assets at all. As losses accumulate, or cash reserves dwindle, a bank becomes unable to pay all depositors, and must suspend operations. During this period, most banks that suspended operations declared bankruptcy. Bank suspensions and failures may incite panic in adjacent communities or regions. This spread of panic, or contagion, can result in a large number of bank failures. Not only do customers lose some or all of their deposits, but also people become wary of banks in general. A widespread withdrawal of bank deposits reduces the amount of money and credit in society. This monetary contraction can contribute to a recession or depression.

Bank failures were a common event throughout the 1920s. In any year, it was normal for several hundred banks to fail. In 1930, the number of failures increased substantially. Failures and contagious panics occurred repeatedly during the contraction years. President Hoover recognized that the banking system required assistance. However, the President also believed that this assistance, like charity, should come from the private sector rather than the government, if at all possible.

The National Credit Corporation

To this end, Hoover encouraged a number of major banks to form the National Credit Corporation (NCC), to lend money to other banks experiencing difficulties. The NCC was announced on October 13, 1931, and began operations on November 11, 1931. However, the banks in the NCC were not enthusiastic about this endeavor, and made loans very reluctantly, requiring that borrowing banks pledge their best assets as collateral, or security for the loan. Hoover quickly recognized that the NCC would not provide the necessary relief to the troubled banking system.

RFC Approved, January 1932

Eugene Meyer, Governor of the Federal Reserve Board, convinced the President that a public agency was needed to make loans to troubled banks. On December 7, 1931, a bill was introduced to establish the Reconstruction Finance Corporation. The legislation was approved on January 22, 1932, and the RFC opened for business on February 2, 1932.

The original legislation authorized the RFC’s existence for a ten-year period. However, Presidential approval was required to operate beyond January 1, 1933, and Congressional approval was required for lending authority to continue beyond January 1, 1934. Subsequent legislation extended the life of the RFC and added many additional responsibilities and authorities.

The RFC was funded through the United States Treasury. The Treasury provided $500 million of capital to the RFC, and the RFC was authorized to borrow an additional $1.5 billion from the Treasury. The Treasury, in turn, sold bonds to the public to fund the RFC. Over time, this borrowing authority was increased manyfold. Subsequently, the RFC was authorized to sell securities directly to the public to obtain funds. However, most RFC funding was obtained by borrowing from the Treasury. During its years of existence, the RFC borrowed $51.3 billion from the Treasury, and $3.1 billion from the public.

The RFC During the Hoover Administration

RFC Authorized to Lend to Banks and Others

The original legislation authorized the RFC to make loans to banks and other financial institutions, to railroads, and for crop loans. While the original objective of the RFC was to help banks, railroads were assisted because many banks owned railroad bonds, which had declined in value, because the railroads themselves had suffered from a decline in their business. If railroads recovered, their bonds would increase in value. This increase, or appreciation, of bond prices would improve the financial condition of banks holding these bonds.

Through legislation approved on July 21, 1932, the RFC was authorized to make loans for self-liquidating public works project, and to states to provide relief and work relief to needy and unemployed people. This legislation also required that the RFC report to Congress, on a monthly basis, the identity of all new borrowers of RFC funds.

RFC Undercut by Requirement That It Publish Names of Banks Receiving Loans

From its inception through Franklin Roosevelt’s inauguration on March 4, 1933, the RFC primarily made loans to financial institutions. During the first months following the establishment of the RFC, bank failures and currency holdings outside of banks both declined. However, several loans aroused political and public controversy, which was the reason the July 21, 1932 legislation included the provision that the identity of banks receiving RFC loans from this date forward be reported to Congress. The Speaker of the House of Representatives, John Nance Garner, ordered that the identity of the borrowing banks be made public. The publication of the identity of banks receiving RFC loans, which began in August 1932, reduced the effectiveness of RFC lending. Bankers became reluctant to borrow from the RFC, fearing that public revelation of a RFC loan would cause depositors to fear the bank was in danger of failing, and possibly start a panic. Legislation passed in January 1933 required that the RFC publish a list of all loans made from its inception through July 21, 1932, the effective date for the publication of new loan recipients.

RFC, Politics and Bank Failure in February and March 1933

In mid-February 1933, banking difficulties developed in Detroit, Michigan. The RFC was willing to make a loan to the troubled bank, the Union Guardian Trust, to avoid a crisis. The bank was one of Henry Ford’s banks, and Ford had deposits of $7 million in this particular bank. Michigan Senator James Couzens demanded that Henry Ford subordinate his deposits in the troubled bank as a condition of the loan. If Ford agreed, he would risk losing all of his deposits before any other depositor lost a penny. Ford and Couzens had once been partners in the automotive business, but had become bitter rivals. Ford refused to agree to Couzens’ demand, even though failure to save the bank might start a panic in Detroit. When the negotiations failed, the governor of Michigan declared a statewide bank holiday. In spite of the RFC’s willingness to assist the Union Guardian Trust, the crisis could not be averted.

The crisis in Michigan resulted in a spread of panic, first to adjacent states, but ultimately throughout the nation. By the day of Roosevelt’s inauguration, March 4, all states had declared bank holidays or had restricted the withdrawal of bank deposits for cash. As one of his first acts as president, on March 5 President Roosevelt announced to the nation that he was declaring a nationwide bank holiday. Almost all financial institutions in the nation were closed for business during the following week. The RFC lending program failed to prevent the worst financial crisis in American history.

Criticisms of the RFC

The effectiveness of RFC lending to March 1933 was limited in several respects. The RFC required banks to pledge assets as collateral for RFC loans. A criticism of the RFC was that it often took a bank’s best loan assets as collateral. Thus, the liquidity provided came at a steep price to banks. Also, the publicity of new loan recipients beginning in August 1932, and general controversy surrounding RFC lending probably discouraged banks from borrowing. In September and November 1932, the amount of outstanding RFC loans to banks and trust companies decreased, as repayments exceeded new lending.

The RFC in the New Deal

FDR Sees Advantages in Using the RFC

President Roosevelt inherited the RFC. He and his colleagues, as well as Congress, found the independence and flexibility of the RFC to be particularly useful. The RFC was an executive agency with the ability to obtain funding through the Treasury outside of the normal legislative process. Thus, the RFC could be used to finance a variety of favored projects and programs without obtaining legislative approval. RFC lending did not count toward budgetary expenditures, so the expansion of the role and influence of the government through the RFC was not reflected in the federal budget.

RFC Given the Authority to Buy Bank Stock

The first task was to stabilize the banking system. On March 9, 1933, the Emergency Banking Act was approved as law. This legislation and a subsequent amendment improved the RFC’s ability to assist banks by giving it the authority to purchase bank preferred stock, capital notes and debentures (bonds), and to make loans using bank preferred stock as collateral. While banks were initially reluctant, the RFC encouraged banks to issue preferred stock for it to purchase. This provision of capital funds to banks strengthened the financial position of many banks. Banks could use the new capital funds to expand their lending, and did not have to pledge their best assets as collateral. The RFC purchased $782 million of bank preferred stock from 4,202 individual banks, and $343 million of capital notes and debentures from 2,910 individual bank and trust companies. In sum, the RFC assisted almost 6,800 banks. Most of these purchases occurred in the years 1933 through 1935.

The preferred stock purchase program did have controversial aspects. The RFC officials at times exercised their authority as shareholders to reduce salaries of senior bank officers, and on occasion, insisted upon a change of bank management. However, the infusion of new capital into the banking system, and the establishment of the Federal Deposit Insurance Corporation to insure bank depositors against loss, stabilized the financial system. In the years following 1933, bank failures declined to very low levels.

RFC’s Assistance to Farmers

Throughout the New Deal years, the RFC’s assistance to farmers was second only to its assistance to bankers. Total RFC lending to agricultural financing institutions totaled $2.5 billion. Over half, $1.6 billion, went to its subsidiary, the Commodity Credit Corporation. The Commodity Credit Corporation was incorporated in Delaware in 1933, and operated by the RFC for six years. In 1939, control of the Commodity Credit Corporation was transferred to the Department of Agriculture, were it remains today.

Commodity Credit Corporation

The agricultural sector was hit particularly hard by depression, drought, and the introduction of the tractor, displacing many small and tenant farmers. The primary New Deal program for farmers was the Agricultural Adjustment Act. Its objective was to reverse the decline of product prices and farm incomes experienced since 1920. The Commodity Credit Corporation contributed to this objective by purchasing selected agricultural products at guaranteed prices, typically above the prevailing market price. Thus, the CCC purchases established a guaranteed minimum price for these farm products.

The RFC also funded the Electric Home and Farm Authority, a program designed to enable low- and moderate- income households to purchase gas and electric appliances. This program would create demand for electricity in rural areas, such as the area served by the new Tennessee Valley Authority. Providing electricity to rural areas was the objective of the Rural Electrification Program.

Decline in Bank Lending Concerns RFC and New Deal Officials

After 1933, bank assets and bank deposits both increased. However, banks changed their asset allocation dramatically during the recovery years. Prior to the depression, banks primarily made loans, and purchased some securities, such as U.S. Treasury securities. During the recovery years, banks primarily purchased securities, which involved less risk. Whether due to concerns over safety, or because potential borrowers had weakened financial positions due to the depression, bank lending did not recover, as indicated by the data in Table 1.

The relative decline in bank lending was a major concern for RFC officials and the New Dealers, who felt that lack of lending by banks was hindering economic recovery. The sentiment within the Roosevelt administration was that the problem was banks’ unwillingness to lend. They viewed the lending by the Commodity Credit Corporation and the Electric Home and Farm Authority, as well as reports from members of Congress, as evidence that there was unsatisfied business loan demand.

Year Bank Loans and Investments in Millions of Dollars Bank Loans in Millions of Dollars Bank Net Deposits in Millions of Dollars Loans as a Percentage of Loans and Investments Loans as a Percentage of Net Deposits
1921 39895 28927 30129 73% 96%
1922 39837 27627 31803 69% 87%
1923 43613 30272 34359 69% 88%
1924 45067 31409 36660 70% 86%
1925 48709 33729 40349 69% 84%
1926 51474 36035 42114 70% 86%
1927 53645 37208 43489 69% 86%
1928 57683 39507 44911 68% 88%
1929 58899 41581 45058 71% 92%
1930 58556 40497 45586 69% 89%
1931 55267 35285 41841 64% 84%
1932 46310 27888 32166 60% 87%
1933 40305 22243 28468 55% 78%
1934 42552 21306 32184 50% 66%
1935 44347 20213 35662 46% 57%
1936 48412 20636 41027 43% 50%
1937 49565 22410 42765 45% 52%
1938 47212 20982 41752 44% 50%
1939 49616 21320 45557 43% 47%
1940 51336 22340 49951 44% 45%

Source: Banking and Monetary Statistics, 1914 –1941.
Net Deposits are total deposits less interbank deposits.
All data are for the last business day of June in each year.

RFC Provides Credit to Business

Due to the failure of bank lending to return to pre-Depression levels, the role of the RFC expanded to include the provision of credit to business. RFC support was deemed as essential for the success of the National Recovery Administration, the New Deal program designed to promote industrial recovery. To support the NRA, legislation passed in 1934 authorized the RFC and the Federal Reserve System to make working capital loans to businesses. However, direct lending to businesses did not become an important RFC activity until 1938, when President Roosevelt encouraged expanding business lending in response to the recession of 1937-38.

RFC Mortgage Company

During the depression, many families and individuals were unable to make their mortgage payments, and had their homes repossessed. Another New Deal goal was to provide more funding for mortgages, to avoid the displacement of homeowners. In June 1934, the National Housing Act provided for the establishment of the Federal Housing Administration (FHA). The FHA would insure mortgage lenders against loss, and FHA mortgages required a smaller percentage down payment than was customary at that time, thus making it easier to purchase a house. In 1935, the RFC Mortgage Company was established to buy and sell FHA-insured mortgages.

RFC and Fannie Mae

Financial institutions were reluctant to purchase FHA mortgages, so in 1938 the President requested that the RFC establish a national mortgage association, the Federal National Mortgage Association, or Fannie Mae. Fannie Mae was originally funded by the RFC to create a market for FHA and later Veterans Administration (VA) mortgages. The RFC Mortgage Company was absorbed by the RFC in 1947. When the RFC was closed, its remaining mortgage assets were transferred to Fannie Mae. Fannie Mae evolved into a private corporation. During its existence, the RFC provided $1.8 billion of loans and capital to its mortgage subsidiaries.

RFC and Export-Import Bank

President Roosevelt sought to encourage trade with the Soviet Union. To promote this trade, the Export-Import Bank was established in 1934. The RFC provided capital, and later loans to the Ex-Im Bank. Interest in loans to support trade was so strong that a second Ex-Im bank was created to fund trade with other foreign nations a month after the first bank was created. These two banks were merged in 1936, with the authority to make loans to encourage exports in general. The RFC provided $201 million of capital and loans to the Ex-Im Banks.

Other RFC activities during this period included lending to federal government agencies providing relief from the depression including the Public Works Administration and the Works Progress Administration, disaster loans, and loans to state and local governments.

RFC Pushed Up the Price of Gold, Devalues the Dollar

Evidence of the flexibility afforded through the RFC was President Roosevelt’s use of the RFC to affect the market price of gold. The President wanted to reduce the gold value of the dollar from $20.67 per ounce of gold. As the dollar price of gold increased, the dollar exchange rate would fall relative to currencies that had a fixed gold price. A fall in the value of the dollar makes exports cheaper and imports more expensive. In an economy with high levels of unemployment, a decline in imports and increase in exports would increase domestic employment.

The goal of the RFC purchases was to increase the market price of gold. During October 1933 the RFC began purchasing gold at a price of $31.36 per ounce. The price was gradually increased to over $34 per ounce. The RFC price set a floor for the price of gold. In January 1934, the new official dollar price of gold was fixed at $35.00 per ounce, a 59% devaluation of the dollar.

Twice President Roosevelt instructed Jesse Jones, the president of the RFC, to stop lending, as he intended to close the RFC. The first occasion was in October 1937, and the second was in early 1940. The recession of 1937-38 caused Roosevelt to authorize the resumption of RFC lending in early 1938. The German invasion of France and the Low Countries gave the RFC new life on the second occasion.

The RFC in World War II

In 1940 the scope of RFC activities increased significantly, as the United States began preparing to assist its allies, and for possible direct involvement in the war. The RFC’s wartime activities were conducted in cooperation with other government agencies involved in the war effort. For its part, the RFC established seven new corporations, and purchased an existing corporation. The eight RFC wartime subsidiaries are listed in Table 2, below.

Table 2
RFC Wartime Subsidiaries
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 (later War Assets Corporation)

Source: Final Report of the Reconstruction Finance Corporation

Development of Materials Cut Off By the War

The RFC subsidiary corporations assisted the war effort as needed. 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.

Other War-Related Activities

Other war-related activities included financing plant conversion and construction for the production of military and essential goods, to deal and stockpile strategic materials, to purchase materials to reduce the supply available to enemy nations, to administer war damage insurance programs, and to finance construction of oil pipelines from Texas to New Jersey to free tankers for other uses.

During its existence, RFC management made discretionary loans and investments of $38.5 billion, of which $33.3 billion was actually disbursed. Of this total, $20.9 billion was disbursed to the RFC’s wartime subsidiaries. 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 Final Years of the RFC, 1946-1953

After the war, RFC lending decreased dramatically. In the postwar years, only in 1949 was over $1 billion authorized. Through 1950, most of this lending was directed toward businesses and mortgages. On September 7, 1950, Fannie Mae was transferred to the Housing and Home Finance Agency. During its last three years, almost all RFC loans were to businesses, including loans authorized under the Defense Production Act.

Eisenhower Terminates the RFC

President Eisenhower was inaugurated in 1953, and shortly thereafter legislation was passed terminating the RFC. The original RFC legislation authorized operations for one year of a possible ten-year existence, giving the President the option of extending its operation for a second year without Congressional approval. The RFC survived much longer, continuing to provide credit for both the New Deal and World War II. Now, the RFC would finally be closed.

Small Business Administration

However, there was concern that the end of RFC business loans would hurt small businesses. Thus, the Small Business Administration (SBA) was created in 1953 to continue the program of lending to small businesses, as well as providing training programs for entrepreneurs. The disaster loan program was also transferred to the SBA.

Through legislation passed on July 30, 1953, RFC lending authority ended on September 28, 1953. The RFC continued to collect on its loans and investments through June 30, 1957, at which time all remaining assets were transferred to other government agencies. At the time the liquidation act was passed, the RFC’s production of synthetic rubber, tin, and abaca remained in operation. Synthetic rubber operations were sold or leased to private industry. The tin and abaca programs were ultimately transferred to the General Services Administration.

Successors of the RFC

Three government agencies and one private corporation that were related to the RFC continue today. The Small Business Administration was established to continue lending to small businesses. The Commodity Credit Corporation continues to provide assistance to farmers. The Export-Import Bank continues to provide loans to promote exports. Fannie Mae became a private corporation in 1968. Today it is the most important source of mortgage funds in the nation, and has become one of the largest corporations in the country. Its stock is traded on the New York Stock Exchange under the symbol FNM.

Economic Analysis of the RFC

Role of a Lender of Last Resort

The American central bank, the Federal Reserve System, was created to be a lender of last resort. A lender of last resort exists to provide liquidity to banks during crises. The famous British central banker, Walter Bagehot, advised, “…in a panic the holders of the ultimate Bank reserve (whether one bank or many) should lend to all that bring good securities quickly, freely, and readily. By that policy they allay a panic…”

However, the Fed was not an effective lender of last resort during the depression years. Many of the banks experiencing problems during the depression years were not members of the Federal Reserve System, and thus could not borrow from the Fed. The Fed was reluctant to assist troubled banks, and banks also feared that borrowing from the Fed might weaken depositors’ confidence.

President Hoover hoped to restore stability and confidence in the banking system by creating the Reconstruction Finance Corporation. The RFC made collateralized loans to banks. Many scholars argue that initially RFC lending did provide relief. These observations are based on the decline in bank suspensions and public currency holdings in the months immediately following the creation of the RFC in February 1932. These data are presented in Table 3.

Table 3
1932 Currency in Millions of Dollars Bank Suspensions Number
January 4896 342
February 4824 119
March 4743 45
April 4751 74
May 4746 82
June 4959 151
July 5048 132
August 4988 85
September 4941 67
October 4863 102
November 4842 93
December 4830 161

Data sources: Currency – Friedman and Schwartz (1963)
Bank suspensions – Board of Governors (1937)

Bank suspensions occur when banks cannot open for normal business operations due to financial problems. Most bank suspensions ended in failure of the bank. Currency held by the public can be an indicator of public confidence in banks. As confidence declines, members of the public convert deposits to currency, and vice versa.

The banking situation deteriorated in June 1932 when a crisis developed in and around Chicago. Both Friedman and Schwartz (1963) and Jones (1951) assert that an RFC loan to a key bank helped to end the crisis, even though the bank subsequently failed.

The Debate over the Impact of the RFC

Two studies of RFC lending have come to differing conclusions. Butkiewicz (1995) examines the effect of RFC lending on bank suspensions and finds that lending reduced suspensions in the months prior to publication of the identities of loan recipients. He further argues that publication of the identities of banks receiving loans discouraged banks from borrowing. As noted above, RFC loans to banks declined in two months after publication began. Mason (2001) examines the impact of lending on a sample of Illinois banks and finds that those receiving RFC loans were increasingly likely to fail. Thus, the limited evidence provided from scholarly studies provides conflicting results about the impact of RFC lending.

Critics of RFC lending to banks argue that the RFC took the banks’ best assets as collateral, thereby reducing bank liquidity. Also, RFC lending requirements were initially very stringent. After the financial collapse in March 1933, the RFC was authorized to provide banks with capital through preferred stock and bond purchases. This change, along with the creation of the Federal Deposit Insurance System, stabilized the banking system.

Economic and Noneconomic Rationales for an Agency Like the RFC

Beginning 1933, the RFC became more directly involved in the allocation of credit throughout the economy. There are several economic reasons why a government agency might actively participate in the allocation of liquid capital funds. These are market failure, externalities, and noneconomic reasons.

A market failure occurs if private markets fail to allocate resources efficiently. For example, small business owners complain that markets do not provide enough loans at reasonable interest rates, a so-called “credit gap”. However, small business loans are riskier than loans to large corporations. Higher interest rates compensate for the greater risk involved in lending to small businesses. Thus, the case for a market failure is not compelling. However, small business loans remain politically popular.

An externality exists when the benefits to society are greater than the benefits to the individuals involved. For example, loans to troubled banks may prevent a financial crisis. Purchases of bank capital may also help stabilize the financial system. Prevention of financial crises and the possibility of a recession or depression provide benefits to society beyond the benefits to bank depositors and shareholders. Similarly, encouraging home ownership may create a more stable society. This argument is often used to justify government provision of funds to the mortgage market.

While wars are often fought over economic issues, and wars have economic consequences, a nation may become involved in a war for noneconomic reasons. Thus, the RFC wartime programs were motivated by political reasons, as much or more than economic reasons.

The RFC was a federal credit agency. The first federal credit agency was established in 1917. However, federal credit programs were relatively limited until the advent of the RFC. Many RFC lending programs were targeted to help specific sectors of the economy. A number of these activities were controversial, as are some federal credit programs today. Three important government agencies and one private corporation that descended from the RFC still operate today. All have important effects on the allocation of credit in our economy.

Criticisms of Governmental Credit Programs

Critics of federal credit programs cite several problems. One is that these programs subsidize certain activities, which may result in overproduction and misallocation of resources. For example, small businesses can obtain funds through the SBA at lower interest rates than are available through banks. This interest rate differential is a subsidy to small business borrowers. Crop loans and price supports result in overproduction of agricultural products. In general, federal credit programs reallocate capital resources to favored activities.

Finally, federal credit programs, including the RFC, are not funded as part of the normal budget process. They obtain funds through the Treasury, or their own borrowings are assumed to have the guarantee of the federal government. Thus, their borrowing is based on the creditworthiness of the federal government, not their own activities. These “off-budget” activities increase the scope of federal involvement in the economy while avoiding the normal budgetary decisions of the President and Congress. Also, these lending programs involve risk. Default on a significant number of these loans might require the federal government to bail out the affected agency. Taxpayers would bear the cost of a bailout.

Any analysis of market failures, externalities, or federal programs should involve a comparison of costs and benefits. However, precise measurement of costs and benefits in these cases is often difficult. Supporters value the benefits very highly, while opponents argue that the costs are excessive.


The RFC was created to assist banks during the Great Depression. It experienced some, albeit limited, success in this activity. However, the RFC’s authority to borrow directly from the Treasury outside the normal budget process proved very attractive to President Roosevelt and his advisors. Throughout the New Deal, the RFC was used to finance a vast array of favored activities. During World War II, RFC lending to its subsidiary corporations was an essential component of the war effort. It was the largest and most important federal credit program of its time. Even after the RFC was closed, some of its lending activities have continued through agencies and corporations that were first established or funded by the RFC. These descendent organizations, especially Fannie Mae, play a very important role in the allocation of credit in the American economy. The legacy of the RFC continues, long after it ceased to exist.


Data Sources

Banking data are from Banking and Monetary Statistics, 1914-1941, Board of Governors of the Federal Reserve System, 1943.

RFC data are from Final Report on the Reconstruction Finance Corporation, Secretary of the Treasury, 1959.

Currency data are from The Monetary History of the United States, 1867-1960, Friedman and Schwartz, 1963.

Bank suspension data are from Federal Reserve Bulletin, Board of Governors, September 1937.


Bagehot, Walter. Lombard Street: A Description of the Money Market. New York: Scribner, Armstrong & Co., 1873.

Board of Governors of the Federal Reserve System. Banking and Monetary Statistics, 1914-1941. Washington, DC, 1943.

Board of Governors of the Federal Reserve System. Federal Reserve Bulletin. September 1937.

Bremer, Cornelius D. American Bank Failures. New York: AMS Press, 1968.

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 32, no. 2 (1995): 197-216.

Butkiewicz, James L. “The Reconstruction Finance Corporation, the Gold Standard, and the Banking Panic of 1933.” Southern Economic Journal 66, no. 2 (1999): 271-93.

Chandler, Lester V. America’s Greatest Depression, 1929-1941. New York: Harper and Row, 1970.

Friedman, Milton, and Anna J. Schwartz. The Monetary History of the United States, 1867-1960. Princeton, NJ: Princeton University Press, 1963.

Jones, Jesse H. Fifty Billion Dollars: My Thirteen Years with the RFC, 1932-1945. New York: Macmillan Co., 1951.

Keehn, Richard H., and Gene Smiley. “U.S. Bank Failures, 1932-1933: A Provisional Analysis.” Essays in Economic and Business History 6 (1988): 136-56.

Keehn, Richard H., and Gene Smiley. “U.S. Bank Failures, 1932-33: Additional Evidence on Regional Patterns, Timing, and the Role of the Reconstruction Finance Corporation.” Essays in Economic and Business History 11 (1993): 131-45.

Kennedy, Susan E. The Banking Crisis of 1933. Lexington, KY: University of Kentucky Press, 1973.

Mason, Joseph R. “Do Lender of Last Resort Policies Matter? The Effects of Reconstruction Finance Corporation Assistance to Banks During the Great Depression.” Journal of Financial Services Research 20, no 1. (2001): 77-95.

Nadler, Marcus, and Jules L. Bogen. The Banking Crisis: The End of an Epoch. New York, NY: Arno Press, 1980.

Olson, James S. Herbert Hoover and the Reconstruction Finance Corporation. Ames, IA: Iowa State University Press, 1977.

Olson, James S. Saving Capitalism: The Reconstruction Finance Corporation in the New Deal, 1933-1940. Princeton, NJ: Princeton University Press, 1988.

Saulnier, R. J., Harold G. Halcrow, and Neil H. Jacoby. Federal Lending and Loan Insurance. Princeton, NJ: Princeton University Press, 1958.

Schlesinger, Jr., Arthur M. The Age of Roosevelt: The Coming of the New Deal. Cambridge, MA: Riverside Press, 1957.

Secretary of the Treasury, Final Report on the Reconstruction Finance Corporation. Washington, DC: United States Government Printing Office, 1959.

Sprinkel, Beryl Wayne. “Economic Consequences of the Operations of the Reconstruction Finance Corporation.” Journal of Business of the University of Chicago 25, no. 4 (1952): 211-24.

Sullivan, L. Prelude to Panic: The Story of the Bank Holiday. Washington, DC: Statesman Press, 1936.

Trescott, Paul B. “Bank Failures, Interest Rates, and the Great Currency Outflow in the United States, 1929-1933.” Research in Economic History 11 (1988): 49-80.

Upham, Cyril B., and Edwin Lamke. Closed and Distressed Banks: A Study in Public Administration. Washington, DC: Brookings Institution, 1934.

Wicker, Elmus. The Banking Panics of the Great Depression. Cambridge: Cambridge University Press, 1996.

Web Links

Commodity Credit Corporation

Ex-Im Bank

Fannie Mae

Small Business Administration

Citation: Butkiewicz, James. “Reconstruction Finance Corporation”. EH.Net Encyclopedia, edited by Robert Whaples. July 19, 2002. URL