Financial History 143 Fall 2022 - Page 18

THE RECONSTRUCTION FINANCE CORPORATION

A Model for a Federal Infrastructure Bank ?

Official White House Photo by Cameron Smith
By Michael A . Martorelli
Getting President Joseph Biden ’ s signature on the $ 1.2 trillion Infrastructure Investment and Jobs Act in November 2021 only partially satisfied many legislators ’ hopes for addressing an important issue . The Infrastructure Bank Act of 2021 ( H . R . 3339 ) would create a long-term solution to the problems of the nation ’ s deteriorating bridges , water systems , power grids , etc . That bill recalls the Reconstruction Finance Corporation ( RFC )— a government agency intended to be a temporary savior to the banking industry . It achieved its greatest success by making much-needed loans and investments to
President Joe Biden signs the Infrastructure Investment and Jobs Act on November 15 , 2021 . support a wide variety of business activities and infrastructure projects over a surprisingly long period of time . Even the well-informed readers of Financial History may not know the full story of that 1932 creation .
In the autumn of 1931 , President Herbert Hoover was sympathetic to the problems plaguing America . The economy had been weakening for two years . The Index of Industrial Production fell from 118 in October 1929 to 84 in December 1930 and 73 in October 1931 . The banking industry was experiencing its own period of distress . More than 1,350 banks suspended their operations in 1930 , costing depositors more than $ 853 million . Consumers responded to the financial system ’ s problems by withdrawing massive amounts of cash from their banks . The industry ’ s deposit base shrunk from more than $ 40 billion at the end of 1929 to about $ 30 billion by the last quarter of 1931 .
The President believed the nation ’ s most serious financial problem was the banking system ’ s failure to provide enough credit to meet demand ; he did not appreciate the fact that poor economic conditions were behind the lack of demand for credit by businessmen , farmers and consumers . He thought that helping the banking industry make more credit available to potential borrowers would go a long way towards spurring an economic recovery . He did not see a direct role for the federal government in this effort . But he did see one for the country ’ s strongest banks .
In October 1931 , President Hoover persuaded a small group of New York institutions to create a pool of up to $ 500 million of capital to fund the National Credit Corporation ( NCC ). He expected that organization to lend those funds to weakly capitalized state banks that were not able to access the Federal Reserve ’ s lending facility . ( At the time , only about one-third of the nation ’ s 22,000 banks were members of the Fed and able to borrow money from that central bank .) Even while announcing the creation of this
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