By late 1931, the grip of the Great Depression was so strong on the American economy that Herbert Hoover had moved away from the laissez faire policies of Treasury Secretary Andrew W. Mellon. The president now believed that the decline of industry and agriculture could be halted, unemployment reversed and purchasing power restored if the government would shore up banks and railroads an approach that had been used with some success during World War I.
Hoover presented his plan in his annual address to Congress in December and gained approval from both houses of congress on the same day in January 1932. This legislation created the Reconstruction Finance Corporation (RFC) under the following terms:
Congress provided the agency with an initial capitalization in the amount of $500 million
The RFC was empowered to borrow up to $2 billion to assure the survival of large banks, railroads, farm mortgage associations, savings and loan associations and life insurance companies.
Charles G. Dawes, a former vice president and ambassador to the Court of St. James, was named the first president of the RFC. In time, about $2 billion was loaned to the targeted organizations and, as hoped, bankruptcies in many areas were slowed. Congress seized on the encouraging news and pressed to extend RFC loans to other sectors of the economy. Hoover, however, resisted a broad-based expansion of the program, but did allow some loans to state agencies that sponsored employment-generating construction projects.
Despite some initial success, the Reconstruction Finance Corporation never had its intended impact. By its very structure, it was in some ways a self-defeating agency. The law required full transparency the amounts of all loans and the names of the recipient companies were made public. This requirement had the unfortunate effect of undermining confidence in the institutions that sought loans. Too often, for example, a bank that asked for federal assistance suffered an immediate run on its funds by worried depositors.
Further, much of the potential good done by the RFC was erased by tax and tariff policies that seemed to work against economic recovery.
Democratic politicians argued with some justification that federal assistance was going to the wrong end of the economic pyramid. They believed that recovery would not occur until the people at the bottom of the heap had their purchasing power restored, but the RFC poured money in at the top. To many Americans, the Reconstruction Finance Corporation was viewed as a relief program for big business only.