The Reconstruction Finance Corporation (RFC) was a government corporation in the United States that operated between 1932 and 1957 which provided financial support to state and local governments and made loans to banks, railroads, mortgage associations and other businesses. Its aim was to boost the country’s confidence and help banks return to performing daily functions after the start of the great depression. It continued to operate through the New Deal where it became more prominent and through World War II. It was disbanded in 1957 when the US government felt it no longer needed to stimulate lending.
It was an independent agency of the United States government, established and chartered by the US Congress in 1932, Act of January 22, 1932, c. 8, 47 Stat. 5, during the administration of President Herbert Hoover. When Eugene Meyer became Governor of the Federal Reserve Board, he had suggested creating the RFC. It was modeled after the War Finance Corporation of World War I. The agency gave $2 billion in aid to state and local governments and made a large number of loans which were nearly all repaid. The RFC was created to solve the problem that the Federal Reserve could not fix by itself since they had some limitations. The Federal Reserve System was created in 1913 to act as a lender of last resort during financial panics but was not able to lend to every bank or firm.
The RFC continued under the New Deal and played a major role in recapitalizing banks. The Reconstruction Finance Corporation was effective at reducing the probability of bank failure and stimulating bank lending.  The Reconstruction Finance Corporation played a major role in handling the Great Depression in the United States and setting up the relief programs that were taken over by the New Deal in 1933. 
The Federal Reserve’s mission was to act as a lender of last resort to banks during financial panics. There were other missions as well but the leaders were in conflict in how to itemize their missions. The Federal Reserve banks were not able to come up with a solution to which everyone agreed with and the Board did not have enough authority to mandate policies or act independently. Many board members in the Federal Reserve, Congress, and the public wanted the Federal Reserve to be more active during this time. Some things that were expected were to increase the amount of money in circulation and to liquidate all financial markets. The ones who opposed these ideas believed that policies that would allow this would end the contraction and/or eventually create high inflation. These things would hurt the economy in the future.
To solve this problem, the Reconstruction Finance Corporation (RFC) Act was drafted. Like the Federal Reserve, the RFC would loan to banks. Even though it was owned by the government, the staff consisted of individuals not part of the civil service system. It addressed the problem of state-chartered banks that did not join the Federal Reserve System. Small banks in rural cities were also not part of the Federal Reserve System.
The Reconstruction Finance Corporation initial money came from selling $500 million worth of stock bonds to the US Treasury. To obtain more capital, $1.5 billion bonds were sold again to the Treasury which was then sold to the general public. In the next couple of years the RFC would find itself needing a loan of $51.3 billion from the Treasury and from the public it needed $3.1 billion. A distinction of the RFC and the Federal Reserve was that the RFC would loan money and as collateral could accept they seemed acceptable. Loans would be available to solvent institutions that could not be sold to repay their current responsibilities but in the long-run would be able to accomplish this. A main reason why loans were given out was to relieve the depositors to get their money back. The Reconstruction Finance Corporation spent $1.5 billion in 1932, $1.8 billion in 1933, and $1.8 billion in 1934. Then it dropped to about $350 million a year. On the eve of World War II (August 31, 1939), it greatly expanded to build munitions factories, disbursing $1.8 billion in 1941. The total loaned or otherwise disbursed by the RFC from 1932 through 1941 was $9.465 billion.
The first RFC President was a former Vice President named Charles Dawes. He was not there for long and had to resign to attend to his bank in Chicago. Hoover then appointed Atlee Pomerene of Ohio to head the agency in July 1932. The Presidency of the RFC had switched from a republican (Dawes) to a former Democratic Senator. Hoover's reasons for his surprising reorganization of the RFC included: the broken health and resignations of Eugene Meyer, Paul Bestor, and Charles Gates Dawes; the failure of banks to perform their duties to their clientele or to aid American industry; the country's general lack of confidence in the current board; and Hoover's inability to find any other man who had the ability and was both nationally respected and available. (Shriver 1982)
The RFC was similar to the Federal Reserve in terms of how they were able to contribute to the contraction. The RFC’s purpose was to loan money to banks that couldn’t operate daily functions and like the Federal Reserve, they were influenced to bail out the ones that benefited the government the most. The RFC was bogged down in bureaucracy and failed to disburse much of its funds. It failed to reverse the growth of mass unemployment before 1933 though it was founded only in 1932. Butkiewicz (1995) shows that the RFC initially succeeded in reducing bank failures, but the publication of the names of the recipients of loans beginning in August 1932 (at the demand of Congress) significantly reduced the effectiveness of its loans to banks because it appeared that political considerations had motivated certain loans. Partisan politics thwarted the RFC's efforts, though in 1932 monetary conditions improved because the RFC slowed the decline in the money supply.
The original legislation was not limited to lending to banks and financial institutions, it could also provide loans for railroad construction and crop lands. An amendment that was passed on July 1932, allowed the RFC to provide loans to state and municipal governments. The purpose of these loans was to finance projects like dams and bridges which would be repaid by charging fees to use these structures. To help with unemployment, a relief was created which would be repaid by tax receipts.
Starting in 1933, President Franklin D. Roosevelt kept the agency, increased the funding, streamlined the bureaucracy, and used it to help restore business prosperity, especially in banking and railroads. He appointed Texas banker Jesse H. Jones as head, and Jones turned RFC into an empire with loans made in every state.
Under the New Deal the powers of the RFC were greatly expanded. They now purchased bank stock and extended their loans to agriculture, housing, exports, businesses, governments, and assisted in disaster relief. Roosevelt soon directed the RFC to buy gold to change its market price. The original legislation did not call for identities of the banks receiving loans nor of any reports to Congress. This, however, was changed in July 1932 to make the RFC transparent. Bankers soon were hesitant to ask the RFC for a loan since the public would become aware and begin to consider the possibility of their bank failing causing them to withdraw their deposits.
The RFC also had a division that gave the states loans for emergency relief needs. In a case study of Mississippi, Vogt (1985) examined two areas of RFC funding: aid to banking, which helped many Mississippi banks survive the economic crisis, and work relief, which Roosevelt used to pump money into the state's relief program by extending loans to businesses and local government projects. Although charges of political influence and racial discrimination were levied against RFC activities, the agency made positive contributions and established a federal agency in local communities which provided a reservoir of experienced personnel to implement expanding New Deal programs.
Roosevelt saw this corporation as an advantage to the government. The RFC could finance projects without Congress approving them and the loans would not be included in budget expenditures. Soon the RFC was able to buy bank preferred stock with the Emergency Banking Act of 1933. Buying stock would serve as collateral when banks needed loans. This, however, was somewhat controversial because if the RFC was a shareholder than it could interfere with salaries and bank management. The FDIC was later created to help decrease bank failures and insure bank deposits. The second main assistance was to farmers and their crop lands. The Commodity Credit Corporation was established to provide assistance. The agriculture was hit hard with a drought and machinery like the tractor. One great benefit it provided to these rural cities was the Electric Home and Farm Authority which provided electricity and gas and assistance in buying appliances to use these services.
The mortgage company was affected as well since families were not able to make their payments. This led the RFC to create its own mortgage company to sell and insure mortgages. The Federal National Mortgage Association (also known as Fannie Mae) was established and funded by the RFC. It later became a private corporation. An Export-Import Bank was also created to encourage trade with the Soviet Union. Another bank was established to fund trade with all other foreign nations a month later. They eventually merged and make loans available to exports. Roosevelt wanted to reduce the gold value of the US dollar. In order to accomplish this, the RFC purchased a lot of gold until a price floor was set.
Even before World War II began the RFC’s power were expanded and further expanded during the war. President Roosevelt merged the RFC and the Federal Deposit Insurance Corporation (FDIC), which was one of the landmarks of the New Deal. Oscar Cox, a prime author of the Lend-Lease Act, general counsel of the Foreign Economic Administration joined as well. Lauchlin Currie, formerly of the Federal Reserve Board staff, was the deputy administrator to Leo Crowley.
The RFC established eight new corporations, and purchased an existing corporation. The eight RFC wartime subsidiaries are 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. 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.
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 Petroleum Reserves Corporation was transferred to the Office of Economic Warfare, which was consolidated into the Foreign Economic Administration, which was transferred to the Reconstruction Finance Corporation and changed to the War Assets Corporation. The War Assets Corporation was dissolved as soon as practicable after March 25, 1946.
After World War II ended, loans were not really needed. President Eisenhower was in office when legislation terminated the RFC. The RFC was "abolished as an independent agency by act of Congress (1953) and was transferred to the Department of the Treasury to wind up its affairs, effective June, 1954. It was totally disbanded in 1957." There was only one problem which was that this might hurt small businesses. To solve this problem the Small Business Administration was established to provide loans to small business and training programs were added. Government agencies took over RFC assets and the tin and abaca programs were handled by General Services Administration. The Commodity Credit Corporation which was created to help farmers was still in operation. Another establishment kept in operation is the Export-Import Bank of the United States to encourage exports.
In 1991, Rep. Jamie L. Whitten (Democrat of Mississippi) introduced a bill to reestablish the RFC, but it did not receive a hearing by a congressional committee and he did not reintroduce the bill in subsequent sessions.