April 28, 2021

Analysis

Reconstruction Finance

Like the world system as a whole, segregated cities in the United States have their own finance driven core-periphery dynamics.1 The world economy is structured by countries with competitive export sectors and trade surpluses, like Germany and China, who exhibit underconsumption and excess savings; the US’s debt-fueled economy receives these savings through its domination of global financial markets. The dynamic strengthens the power of global finance at the expense of wages and living standards. And within the US, the allocation of credit and investment has exacerbated racial disparities and altered the municipal geography of debt. At the level of the city and the financial system, these developments warrant a powerful political response. But what form can that response take?

Global underconsumption and a structurally-weakened working class are problems likely to persist as the twenty-first century marches on. Altering the shape of our global economy will require building new institutions capable of funneling excess savings into productive investment. This is not something that can be done with a temporary increase in spending—no matter how large. Moreover, as commentators stressed in the wake of the Black Lives Matter uprisings of 2020, such investment must be democratically managed. Can the tensions and energies created on the local scale be harnessed to address larger macroeconomic imbalances? The history of the New Deal’s Reconstruction Finance Corporation offers a starting point with which to think through these dynamics.

The Reconstruction Finance Corporation as tribune

On the morning of April 24, 1933, five thousand Chicago schoolteachers stormed the lobbies of the five largest financial institutions in the Loop. The Chicago School Board was ten months behind on their salaries, amounting to $30 million owed. Earlier that day, the teachers had marched to the Governor Henry Horner’s mansion to demand pay, but when Horner appeared, he explained that the municipal government’s vaults were empty—“the only way that we can get money is through taxes”—and receipts were already two years overdue. The teachers turned to the monetary control centers instead.2

At City National Bank they demanded to understand why chairman Charles Dawes hadn’t lent the city money, despite the fact that his bank had just received a $90 million loan from the government via the newly formed Reconstruction Finance Corporation (RFC), a government-sponsored enterprise whose express mission was to loosen credit conditions for the wider economy by lending to banks. Dawes had impressive financial credentials: in 1925, he won the Nobel Peace Prize for organizing an international flow of money from US coffers to save the Germans and the French after the indemnities imposed by the Treaty of Versailles proved unworkable, the so-called “Dawes Plan.” Now, his bank flush with loan money from the state, the teachers demanded to know what was keeping him from saving Chicago’s finances. Reluctant to lend to a city two years behind on tax receipts in the middle of the Great Depression, Dawes refused to discuss the matter. In the lobby of the Continental-Illinois National Bank, the protesters pressured the bank president to seek an RFC loan so that he could lend to the city directly, but they were again turned down. The crowd grew agitated, but the police did not disperse it—their paychecks were in arrears too. “Outside their doors a revolt is brewing,” Senator J. Hamilton Lewis of Illinois said of the Chicago situation. “We are on the eve of a revolution unless we use a little common sense.”

The crisis continued through the summer until, on August 25th, it was over: Congress had passed legislation allowing the RFC to lend directly to the Chicago School Board, bypassing the private banks.3 In this moment, the RFC became a direct link between the abstractions of finance and the concrete demands from those in the street.4

Inventing a tradition — war

The origins of the RFC go back to America’s chaotic entry into World War I, when rampant inflation, weakened transportation networks, and tightening corporate financing constraints necessitated state action. Woodrow Wilson charged Treasury Secretary William Gibbs McAdoo and his protégé Bernard Baruch with handling the situation, and Congress summoned into existence a series of administrative agencies for the task.

The US Shipping Board coordinated the construction and refitting of America’s merchant marine for war. In a public-private partnership, the Shipping Board tripled the number of vessels flying the American flag, pushing America’s share of the world fleet up to 22 percent. Though these vessels did not sail until after Versailles, they formed the backbone of American naval and commercial power in the 1920s. The US Railroad Administration nationalized the sector, which was suffering from “excess capacity” and lack of investment. Squeezed between antitrust laws which resulted in product duplication and redundancy on the one hand, and the alliance of populist consumers and regulators aimed at blocking rate hikes on the other, the industry had been unprofitable for some time. The Railroad Administration consolidated lines, suspended antitrust laws, and put up the capital necessary to modernize the system. Perhaps most impressive, the War Industries Board coordinated production, fixed prices, purchased supplies for the Allies, reformatted factories to operate on a war footing, and dictated to corporate management production levels and the sourcing of raw materials.

Sitting above this raft of agencies was the War Finance Corporation. Capitalized by Congress at half a billion dollars, its purpose was to act as an omni-competent executive agency directing credit in the economy to win the war. It helped capitalize the Shipping Board and the Railroad Administration and was a key part of making their adventures possible, but it also lent to public utilities, banks, construction companies, and exporters.5

The men who ran these operations, McAdoo and Baruch, were both Southerners, and this is crucial for interpreting their time in government. The Civil War had liberated nearly four million men, women and children from bondage, simultaneously erasing $3 billion worth of slave capital—three times the size of the entire US industrial capital stock—and transforming the South into an economic backwater. Within this historical context, the ideology of McAdoo and Baruch can be described as a post-populist New Southern nationalism. They were not Redeemers or partisans of the Lost Cause, but capitalists on the make, whose experiences in business keyed them in to the importance of credit. They believed the best way to redevelop the South was to go North, to establish a reputation and connections on which they could capitalize upon returning home. For instance, McAdoo was the moving force behind the Hudson Tubes, a massive construction project completed in 1908 that connects New York and New Jersey. Both were high profile corporate lawyers, in an age when corporations were just coming into their own as the dominant force of American capitalism. Since the Civil War, the commanding heights were located in New York, center of the Eastern financial establishment.

Like the earlier populists, McAdoo and Baruch wanted to expand the American credit system’s geography of inclusion, breaking down its core-periphery structure into a uniformly nationalized economic space. Wilson’s progressive economics alienated many Eastern elites, so he looked elsewhere for capitalists he could claim as supporters. As Wilson’s Treasury secretary, McAdoo vigorously directed credit to the South and West. The federated structure of America’s central bank, for instance, partly reflects these priorities. When the war in Europe broke out, McAdoo and Baruch were well prepared ideologically to take the reins of the national economy, with command-and-control powers the US had never dreamt of before.

Fearing the potential dislocations of the transition to peacetime, Congress repurposed the wartime institutions to smooth reconversion at the end of the war. The Shipping Board handed the private sector a windfall by selling off the merchant marine and using the subsequent revenues to subsidize exports. The War Finance Corporation (WFC) proved more flexible—it also became an export machine, and in 1921 Congress added to its portfolio with the Agricultural Credits Act. The WFC was endowed with extra capital and moved into the business of making subsidized loans to agriculture. Gradually, as the exceptional frame of wartime emergency faded and Harding’s “Return to Normalcy” took hold of the 1920s, these functions were wound down and transferred to other institutions. Shrinking the WFC’s balance sheet to zero took until 1930, and by then the world of national capital was scrambling yet again.

Reviving a tradition — depression

In the wake of Black Tuesday, private investment fell off a cliff. Hebert Hoover tried to organize another pool of capital funded and controlled entirely by private banks, to play the role of the WFC: all-purpose director of credit in the economy. The 1931 National Credit Corporation (NCC) successfully collected $500 million in subscriptions, but lent out barely $10 million in low interest loans to troubled banks. After two years of depression, private capital no longer had the will to confront the radical uncertainty of the events surrounding it. Civil society voluntarism had been a failure—the solution would require the general will of a democratic developmental state to break the financial deadlock. Eugene Meyer, Chairman of the Federal Reserve and former-Chair of the WFC, urged Hoover to admit his NCC had been a failure and to revive the old model. In December he did just that, and the Reconstruction Finance Corporation was born. Hiring the existing WFC staff and occupying its thirty-three offices, the RFC had a readymade team waiting for them when the doors opened in January of 1932. In order to accept loan applications, they simply flipped the signs in their windows to “open.”

After being capitalized by the public, the RFC was a completely independent institution: no oversight from Congress, the President, or the director of the budget was built into its founding legislation. It didn’t even have to reveal the names of borrowers or the amounts lent out. It could borrow money in its own name from capital markets too—so in theory it never needed another appropriation from Congress. It could live indefinitely off the profits from its lending operations.

The RFC was enormously successful at its appointed task. By the end of 1932 it had authorized $1.6 billion in loans, almost all of it going to banks and the railroads. But that appointed task was flawed. Hoover et al. believed that the Great Depression was caused by a lack of credit—that it was banks’ unwillingness to lend that had caused the fall in investment. But the RFC money taken by the banks didn’t find its way into real fixed investments; the banks were simply lending it back to the federal government at higher interest rates.

Radicalizing a tradition — New Deal

FDR wanted to try a different strategy. But like Wilson before him, FDR had scared off the financiers and industrialists in the core of American capitalism; one look at the collective bargaining clauses of the NIRA and they had bolted. And like Wilson before him, FDR looked to capitalists in the periphery to stabilize his coalition. FDR’s new RFC Chairman Jesse Jones was from Texas, and strongly supported the new strategy: bending Eastern capital to the public will in Washington and using it to develop the rest of the nation. The Emergency Banking Act of 1933 authorized the RFC to buy preferred stock in banks, providing not just liquidity and temporary loans, but recapitalizing them. By the end of 1935, the RFC owned stock in half of all banks, and owned one-third of all bank capital in the US.

The RFC was a great client to lend to—with the implicit backing of the federal government and a massive portfolio, banks were eager to offer money to the RFC. Its securities were perfectly safe in a storm and offered a high return. The RFC took that money and used it to bankroll the New Deal.

By early 1936, a mere three years after having taken over the RFC, Jones reported to FDR that the RFC had authorized more than $8 billion in loans, received repayments totaling $3.2 billion, and had earned more than $294 million in interest.6 (By comparison, total New Deal emergency relief spending in the ten years after 1933 amounted to $40 billion.7)

Its customers included the usual suspects of banks, construction companies, and railroads, but also farmers, corporations, federal land banks, cooperatives, insurance companies, livestock credit corporations, and school districts. It built bridges. It built roads. It built the TVA and it built hospitals. It couldn’t and didn’t fund everything by itself, and was usually a minority stakeholder in the projects it capitalized. But the provision of patient, public capital proved sufficient in every case for putting a floor beneath the radical uncertainty of the investment process, drawing private capital back into fixed investment. It was an astonishingly powerful and flexible executive agency. By 1935 it had made 40,000 loans to unique individuals, blanketing every single Congressional district in the nation. A list of recipients of RFC money simply replicates the entire New Deal alphabet soup: FERA, CWA, FHLB, EHFA, DLC, HOLC, FCA, RACC, FICB, FLB, FFLC, FFMC, FHA, REA, RMC, EIB, CCC, NRA, FNMA, and the AAA all received RFC money. The RFC purchased $700 million worth of bonds from Harold Ickes’ PWA, and when the WPA came online in 1935 the RFC lent it $1 billion to start work immediately. When the Federal Deposit Insurance Corporation was created, many banks were not qualified to join—their capital structures were too weak and they would surely fail. This was hardly a circumstance in which the government should have provided insurance, but it was difficult to tell which banks were insolvent and which were merely illiquid, and events were moving fast. The RFC stepped in, lending to and recapitalizing every last financial institution in the country so the new FDIC could be truly universal, promising to sort out the insolvent banks later. In response to the economic downturn of 1937-8, the RFC moved into industrial policy, providing working capital directly to corporations. It wasn’t just providing liquidity—it was socializing investment.

During the war it transformed yet again, using its control of the commanding heights of American capital to help plan the war, much like the WFC had twenty years before. The Fed also helped finance the war by keeping interest rates pegged at a low level. When the Office of Price Administration was dissolved after the war, there was an inflationary spike, but it was the RFC that suffered—the Fed retained control of the money supply, while the RFC’s investment-juicing functions were now seen as extraneous in an economy characterized more by abundance, full employment and full capacity than Depression. After grumblings about favoritism and insider dealing, the RFC was directed to transfer its functions to other departments—for instance, the new post-war Small Business Administration—and to cease issuing new loans. Like the WFC before it, the RFC’s balance sheet tapered off for the better part of a decade. Its memory lived on in state development banks elsewhere—Marshall Plan funds set up the Kreditanstalt für Wiederaufbau in American occupied Germany, for instance. (KfW is now at the cutting edge of green energy.) But by the time Americans began complaining in the late 1950s about the dearth of fixed investment compared to Europe in the heyday of its trente glorieuses, the RFC was already approaching non-existence.

Democracy in America?

We no longer live in a world of capital scarcity, if we ever did.8 The excess savings in the world economy should be rerouted from indebted consumer demand in the US, and channeled instead into a new Reconstruction Finance Corporation.9 The capital should come from the return the Federal Reserve makes on its portfolio managing the dollar empire. In 2015, the Fed remitted $97 billion in profits to the US Treasury; compare that to the $88 billion made by the most profitable company in the world, Saudi Aramco. Right now, that money is treated like tax money—the Treasury reduces the federal debt by that amount, diminishing the quantity of safe assets in the world. Instead, that massive income stream should be rerouted to a neo-RFC, which could leverage it by issuing its own debt, soaking up excess savings and directing it into useful investment projects around the country. There are many such projects: ask cities and states, construction workers, environmentalists, healthcare workers—or Chicago schoolteachers. Even some on the populist right are clamoring for industrial policy today—why not one directed by a neo-RFC?10

A new RFC would also allow us to cope with the failures of American democracy. Without a thick set of civil society associations capable of channeling the energy of mass movements, what kind of historical agent can reorder American capital? History suggests we should look to the periphery. The democratic developmentalist state project in America has often been national in sovereignty but local in leadership and governance.11 In the past, that meant the South-West. Today, the hierarchy of American economic space is oriented around a municipal axis—urban core, ghetto, suburb, exurb, rural.12 The demand to defund the police, mainstreamed by the uprisings of last year, is paired with a demand for funding for more infrastructure and social services, which will have to happen at the state and municipal level.

In the wake of the pandemic, the Fed announced the creation of a Municipal Lending Facility, which made the prospect of direct lending to cities a reality. Even if the specific terms which cities have been offered are poor, and consequently the number of loans authorized has been trivial, it is a powerful precedent. A neo-RFC should take it up, becoming a new bulwark for states and cities against the market. It makes intuitive sense to people—who have seen the monetary floodgates opened twice in a generation—that if you can print money for them you can print it for us. Advancing the democratic project today means not taking the absence of mass politics as a given; it means building institutions capable of coordinating our collective life. If reconstruction finance were readily available, every mayor and city council could become a democratic mediating link to the real abstractions of monetary sovereignty. The Fed can link up with local democratic politics precisely because it is a federal institution. There are thirty-six local offices scattered all across the Union, including one in Minneapolis, only a short walk from where the rebellion began last May.


  1. Destin Jenkins, The Bonds of Inequality (Chicago, 2021). Robert Manduca, “Income Inequality and the Persistence of Racial Economic Disparities,” Sociological Science (2018) 5:182-205, and “The Contribution of National Income Inequality to Regional Economic Divergence,” Social Forces (2019) 98 (2): 578-621; Reardon & Bischoff, “Income inequality and income segregation,” American Journal of Sociology (2011) 116(4) and “The Continuing Increase in Income Segregation, 2007-2012,” (2016); Reardon, Bischoff, Owens, & Townsend, “Has Income Segregation Really Increased? Bias and Bias Correction in Sample-Based Segregation Estimates,” Demography (2018) 55(6), 2129–2160. 
  2. “5,000 Chicago Teachers Storm Five Banks; Dawes Heckled as He Argues With Crowd,” by The Associated Press. New York Times (1923-Current file); Apr 25, 1933; ProQuest Historical Newspapers: The New York Times pg. 1. 
  3. “14,000 Teachers to Get Millions in Chicago Pay,” by The Associated Press. New York Times (1923-Current file); Aug 26, 1934; ProQuest Historical Newspapers: The New York Times pg. N6 
  4. The RFC is wildly under-historicized. The main references on the subject remain James Stuart Olson, Saving Capitalism: The Reconstruction Finance Corporation and the New Deal, 1933-1940 (Princeton, 1988) and Jordan A. Schwarz, The New Dealers: Power Politics in the Age of Roosevelt (Knopf, 1993). 
  5. On capitalization see Jonathan Levy, “Capital as Process and the History of Capitalism,” Business History Review, 91(3), 483-510. 
  6. Olson, Saving Capitalism, 43. 
  7. James T. Sparrow, Warfare State: World War II Americans and the Age of Big Government (Oxford, 2012), 6. 
  8. The literature on secular and supra-secular stagnation suggests that we will be in or near a liquidity trap for the foreseeable future. 
  9. Atif Mian, Ludwig Straub, and Amir Sufi. Working Paper. “Indebted Demand.” 
  10. Arthur Herman, “America Needs an Industrial Policy,” American Affairs Winter 2019 / Volume III, Number 4. 
  11. Tocqueville, Democracy in America; Gary Gerstle, Liberty and Coercion: The Paradox of American Government from the Founding to the Present (Princeton, 2017); Stefan Link and Noam Maggor, “The United States As A Developing Nation: Revisiting The Peculiarities Of American History,” Past & Present 246/1 (2020), 269–306. 
  12. Manduca (2019). 

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