Against the backdrop of the collapse of the financial system and the collapse of the physical economy, President Herbert Hoover formed the Reconstruction Finance Corporation on January 22, 1932. Subsequently, he spent 1.62 billion RFC funds on purely protective measures: assistance to the banking system (and, in addition, the redemption of bonds of railway companies – the most significant asset in the portfolio of banks).
RFC’s activities were aimed at overcoming the effects of the financial crisis and reviving the economy by providing loans to small and large enterprises that suffered during the Great Depression. Subsequently, this initiative was developed and complemented by subsequent governments, and specialized organizations were formed to create small construction and manufacturing enterprises in places with a high concentration of the unemployed. By rejecting attempts to expand the use of RFC, Hoover was unable to stop the collapse of the US physical economy or at least save the banking system.
Reconstruction Finance Corporation started by buying poor loans from banks in order to improve the credit sector. Most historians now agree that this process did not go well, as it was too bureaucratic and at the same time there were no clear criteria for allocating money to those in need – as a result, the decision was greatly influenced by the top managers of the corporation. Gradually, the situation was corrected, the financing of the corporation was increased, and its functions were expanded. As a result, it distributed budget money not only among financial giants but also among small businesses that tried to withstand these difficult years.
The RFC was authorized to issue loans of up to USD 1.5 billion, which were subsequently increased to USD 3 billion. The law allowed the granting of loans to banks and financial organizations of almost any form, railway corporations and agricultural corporations. It did not allow loans to industry, but it was noted that assisting banks increased their ability to lend to the industry. Despite this limitation, the RFC had considerable authority. However, Hoover reduced the Act to one function: to provide useless support to banks and to buyout railway bonds.
Franklin Roosevelt’s view of the RFC was in direct contrast to that of Hoover: in his opinion, the RFC could be used as a powerful primary lending institution that would restore state control over lending in the United States. The owner of the RFC from the very beginning was the US government.
In 1932, Franklin Roosevelt replaced Hoover with a crushing victory. By Roosevelt’s inauguration in early 1933, the financial system had collapsed. President Roosevelt changed strategy. He saw that the RFC could work as the National Bank of Hamilton – to issue loans under government guarantees to stop the collapse and stimulate recovery. One of Roosevelt’s first tasks was to empower the RFC to put the US banking system back on its feet.