The First Government Bailouts: The Story of the RFC
NOVEMBER 30, 2011 by BURTON FOLSOM
The idea of using federal money to bail out large failing corporations did not begin with the Bush administration. In the beginning was the RFC, the Reconstruction Finance Corporation, which President Herbert Hoover pretentiously named and bountifully funded during the Great Depression to bail out corporations deemed too big to fail. In 1932 Congress gave the RFC $2 billion—plus much more later—and the power to choose who got the money.
On the surface the idea behind the RFC sounds good. By 1932 the Great Depression had already been devastating. Banks were failing, railroads were going broke, workers had been laid off by the millions. Why not pump cash into some large struggling companies and keep them serving customers and hiring workers? Jobs would be saved, dollars would flow through the economy, and the Great Depression might be halted.
But there were two big problems. First, the $2 billion the RFC would dole out had to come from taxpayers. And they could have used that money instead to buy radios, shirts, gas, or a host of other products that would have put people to work making and selling these items. In other words, shifting capital from workers who earn it to central planners who spend it may not create or even save jobs.
Second, Hoover’s whole idea of an RFC assumed that a group of wise men could discern the U.S. economy clearly enough to pick the right banks, railroads, and corporations to resuscitate with the right amount of cash. What we find instead is that when an appointed committee like the RFC is matched with large amounts of money, the results quickly become politicized.
Thousands of large U.S. companies wanted capital, but only a fraction of them could get it. Rep. Louis McFadden (R, Pa.), himself a bank president, called the RFC “a scheme for taking $500,000,000 of the people’s money produced by labor at a cost of toil and suffering and giving it to a supercorporation for the sinister purpose of helping a gang of financial looters to cover up their tracks.”
Hoover, a Republican, appointed former Republican Vice President Charles Dawes to head the new RFC. Dawes, however, resigned in June 1932 to care for his bank in Chicago, the Central Republic Bank and Trust Company. Three weeks after his resignation, Dawes won a $90 million loan for his failing bank (it went broke anyway). After that, Atlee Pomerene, the new RFC president, accepted a $12.3 million loan for his Cleveland bank. Joseph Nutt, treasurer of the Republican National Committee, won a $14 million loan for his bank in Cleveland. Republican Senator Phillips Goldsborough of Maryland received a $7.4 million loan for his Baltimore bank. Roy Chapin, Hoover’s secretary of commerce, won $13 million for his Detroit bank.
Some Democrats (Pomerene was a former Democratic senator) also finagled loans from the RFC, but the larger point is that choosing who got loans and who didn’t was a political process that gave capital to the winners and took more in taxes from everyone else. Funding federal programs was expensive. During 1932, for example, the top income earners saw their top tax rate hiked from 25 to 63 percent. Plus Congress that year passed a host of new excise taxes on gas, tires, telephone calls, and movie tickets.
The Other Side’s Turn
When Franklin Roosevelt was elected president, he installed a loyal Democrat, Texas banker Jesse Jones, as the new president of the RFC. Jones helped those Roosevelt sent his way—either through RFC loans or by using his influence with others. J. David Stern, for example, edited the Philadelphia Record, which backed Roosevelt and other Democrats enthusiastically in the election. Stern, however, almost went bankrupt in the 1930s, so Roosevelt asked Jones to help. Jones used his influence in the banking community to secure $1 million in loans to keep Stern publishing.
Some reporters were sensitive to the RFC money and influence offered by Jones. Walter Trohan, the Washington bureau chief for the Chicago Tribune, often interviewed Jones, who according to Trohan would often offer RFC loans and agency-controlled firms to him. “I turned these offers down, because I didn’t know anything about such businesses and because I didn’t think I would be honest in accepting,” Trohan revealed in his book Political Animals.
Others did not have Trohan’s scruples. Hall Roosevelt, the President’s brother-in-law, used White House telephones to request loans from the RFC. According to Jones, “Two or three loans were made in which it appeared Hall Roosevelt had some kind of interest.” At one point the President urged Jones to give Hall the loan he requested because, as Jones wrote in his book, Fifty Billion Dollars, “The president wanted to get Hall as far from the White House as possible.” Jones also helped FDR’s son Elliott escape a $200,000 debt from a failed radio business in Texas.
Defenders of the RFC are quick to cite its many loans and gifts during World War II to big corporations to make weapons and supplies that helped the U.S. government win the war. But even if we assume the right corporations got the right loans and gifts, that still leaves the RFC with no reason to exist after the war. The Great Depression had ended and unemployment had stabilized at under 4 percent in 1946 and 1947, yet the RFC was still aiding corporations.
The Closest Thing to Immortality
True, the RFC had lost its economic purpose, but with all those tax dollars on hand it never lost a political purpose. To repeat what FDR once said about Social Security, the RFC loans “were never a problem of economics. They are politics all the way through.” In other words, congressmen eagerly sought RFC money to bring back to corporations in their districts. President Truman noted that “a great many members of Congress had accepted fees for their influence in getting RFC loans for constituents.”
Not only were congressmen profiting, but RFC staffers were using these loans to get jobs with the lucky companies. John J. Hagerty, for example, head of the RFC in Boston, endorsed a loan to the Waltham Watch Company. Hagerty soon accepted a job with the company for three times his RFC salary.
In 1953 President Eisenhower ended the reign of the RFC, but not completely. Parts of it reemerged as the Small Business Administration—which began making loans to favored small businesses.
What do we learn from the RFC? First, that government programs are easier to start than stop; second, that those programs will cost more than the originators intended; and third, that federal money becomes politicized very quickly, helping politicians to win votes.