Financial History 143 Fall 2022 - Page 19

voluntary effort to boost the nation ’ s supply of credit and stimulate the economy , the President acknowledged that if the NCC did not achieve its goals , he was prepared to support an idea first proposed by Federal Reserve Chairman Eugene Meyer , which was to create a government agency to undertake those tasks .
Unenthusiastic bankers provided only $ 150 million to fund the NCC . Moreover , its officers imposed strict requirements for collateral from banks wanting to access that lending facility . By the end of November , the NCC had made only $ 10 million worth of loans . The President reluctantly acknowledged the failure of his voluntary plan to stimulate more bank lending .
In December , President Hoover sent Congress a bill creating the Reconstruction Finance Corporation ( RFC ). He intended for it to act like the War Finance Corporation ( WFC )— an agency created in 1918 to provide financial support to banking institutions and vital war industries during World War I . Congressional hearings held during the next few weeks revealed the administration ’ s belief that this temporary agency could both strengthen the banking system and restore the public ’ s confidence in it .
As the President signed the act creating the RFC in January 1932 , he emphasized the need for this unprecedented peacetime effort to strengthen the banking system . The law authorized the new agency to loan money to banks and other financial institutions , as well as agricultural and livestock credit corporations . The administration expected banks obtaining RFC funds to then extend more credit to their own customers . The law singled out railroads engaged in interstate commerce as the only privately owned companies also entitled to seek RFC loans . Massive defaults by carriers suffering the effects of the Great Depression would hurt the banks that owned more than 70 % of the industry ’ s bonds and notes outstanding , prompting Congress to agree to aid that one specific component of private enterprise .
The RFC Act authorized the government to provide $ 500 million in capital and gave the agency permission to raise another $ 1.5 billion by issuing bonds or debentures . The RFC was meant to be a temporary agency that would provide
Portrait of President Herbert C . Hoover , 1928 .
emergency funding . Its charter would last 10 years , but its ability to make loans was limited to only one . Agency officials were required to make quarterly reports of their activities to Congress ; they did not need to disclose the names of the borrowers or the amounts of their loans . This quasi-public corporation would be operated by its bipartisan seven-member Board of Directors and a staff of thousands , and it would be independent from Congress , the Treasury Department and the Federal Reserve .
By the middle of 1932 , the RFC had loaned more than $ 1 billion to more than 4,000 borrowers in the approved categories . But bank lending did not increase materially . Bankers were not able to convince the President that the lack of demand for loans was more problematic than the lack of available credit . After some intense negotiations with members of Congress , in July the President signed a law extending the RFC ’ s charter .
The Emergency Relief and Construction Act authorized the agency to make specific amounts of money available for unemployment relief and to help farmers and ranchers ; it allocated money to finance self-liquidating projects , such as bridges and dams that could repay the loans from tolls or fees ; and it designated pools of funds to finance the sale of agricultural commodities and livestock . An
Library of Congress important provision of the law demanded by legislators but detested by President Hoover required the RFC to submit to both the President and the Congress monthly reports detailing the names of each borrower , the amount of their loans and the interest rates they were paying . Bankers did not like having their needs for additional capital made public . Moreover , they remained skeptical of the government ’ s program to “ rescue ” them by forcing them to extend more credit than they believed was warranted .
From February 1932 to the end of President Hoover ’ s term in March 1933 , the RFC loaned more than $ 951 million to banks and trust companies and another $ 325 million to railroads , thus devoting more than 73 % of its total volume of loans to those groups . But since it required good collateral for its loans , the RFC tended to devote most of its resources to relatively strong banks . That new agency did stabilize the banking industry . ( Only 1,456 banks failed in 1932 , costing depositors only $ 715 million .) But the institutions it aided proved either unwilling or unable to use their additional resources to help the broader economy regain its strength . Moreover , banking panics that had become self-fulfilling causes of many failures in the past continued to occur throughout the year . In October , officials in various states began declaring bank “ holidays ” for several days and / or implementing restrictions on customers ’ ability to make withdrawals . By February 1933 , banks in 37 states were under some kind of state-imposed restrictions .
On March 4 , 1933 , Franklin D . Roosevelt ( FDR ) was sworn in as the 32nd President of the United States . Early on March 6 , he issued Proclamation 2039 and suspended all banking transactions for the next four days . On March 9 , he signed the Emergency Banking Act of 1933 . Title III directly affected the RFC by authorizing it to augment banks ’ capital in another way — by purchasing newly issued preferred stock .
The President demonstrated his view of an expanded role for the RFC in not only aiding banks , but also stimulating the economy , when he appointed current Board member Jesse Jones as the agency ’ s new chairman . Jones had been frustrated
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