When Uncle Sam owned banks and factories

Summary

Episode Summary: "When Uncle Sam Owned Banks and Factories"

The Indicator from Planet Money delves into a fascinating yet often overlooked chapter of American economic history: the Reconstruction Finance Corporation (RFC). In this episode, hosts Darian Woods and Waylon Wong, along with economist Chris Hughes, explore how government intervention through the RFC played a pivotal role in shaping the U.S. economy during the Great Depression and World War II. The discussion not only uncovers historical insights but also draws parallels to contemporary government-business interactions.

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Introduction: Rethinking Government and Business Dynamics

The episode opens with Darian Woods and Waylon Wong contemplating recent governmental interventions in private businesses, challenging the long-held belief in the U.S. that the free market solely dictates business success.

Waylon Wong [00:14]: "I don't know about you, Darian, but lately I've been seeing some things in the news that have shaken my idea of what it means to do business in America."

They reference controversial moves such as Zoran Mandani's proposal for government-owned grocery stores in New York City and the Pentagon's acquisition of stakes in rare earth mining companies and US Steel. This sets the stage for a deeper exploration into historical precedents of such government involvement.

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Historical Context: The Reconstruction Finance Corporation

Economist Chris Hughes, author of "Market: The 100-Year Struggle to Shape the American Economy," provides an in-depth analysis of the RFC, a government-run entity established during the Great Depression.

Chris Hughes [03:21]: "It's sort of shocking how few people know that we had a national Investment bank for 20 years in the United States and it was popular on both sides of the aisle."

Founded in 1932 by President Herbert Hoover and Congress, the RFC was designed to extend emergency credit to businesses at risk of bankruptcy—a novel approach at the time. Jesse Jones, a Texas businessman, was appointed to lead the RFC, bringing a dynamic and proactive leadership style.

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Phase One: Stabilizing the Banking System

With the onset of Franklin Roosevelt's presidency in 1933, the RFC entered its first phase: stabilizing the banking system amidst the Great Depression.

Chris Hughes [04:24]: "So the weekend that Roosevelt is inaugurated, he declares a bank 'holiday' all across the country and shuts down virtually all of the American banks."

The RFC worked alongside other entities to recapitalize banks, owning half of the banks by September 1934. This intervention was crucial in preventing further collapse of the financial system, even though the Depression continued to worsen.

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Phase Two: Investing in Housing, Agriculture, and Railroads

As the economic situation did not improve significantly, the RFC transitioned into its second phase, focusing on investing in key industries to spur economic growth.

Chris Hughes [05:23]: "The RFC creates Fannie Mae, creates the 30-year mortgage to make it cheaper and easier for people to buy."

The RFC's initiatives included:

• Housing: Introduction of the 30-year mortgage and the creation of Fannie Mae, which made homeownership more accessible and laid the foundation for the modern mortgage market.

• Agriculture and Railroads: Investments in these sectors aimed to stabilize essential industries and support employment.

Chris Hughes [06:17]: "If you get turned down, buy a bank for your business, walk down the street to the RFC, and we will give you an answer within days."

This period highlighted concerns about moral hazard, as the government was seen as picking winners and losers in the market, potentially encouraging reckless business practices due to the expectation of government bailouts.

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Phase Three: Mobilizing for World War II

The advent of World War II marked the RFC's third phase, where it played a critical role in financing the war effort and boosting the economy.

Darian Woods [07:59]: "The RFC financed American airplane manufacturing and training schools for pilots."

Key contributions included:

• Synthetic Rubber Production: The RFC established 51 government-owned rubber factories and collaborated with existing companies to expedite synthetic rubber production, crucial for military supplies.

• Aircraft Manufacturing: Significant investments in airplane manufacturing and pilot training facilitated the rapid expansion of the U.S. air force.

By 1944, the RFC had not only driven innovation in synthetic materials but also ensured a surplus of rubber post-war, albeit humorously noted by Waylon Wong as leading to an overproduction of bouncy balls.

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Decline and Dissolution of the RFC

Despite its successes, the RFC was disbanded after World War II. Several factors contributed to its decline:

• Political Shifts: President Roosevelt's dismissal of Jesse Jones amidst conflicts limited the RFC's leadership and vision.

• Downsizing Government: A broader post-war sentiment favored reducing government intervention in the economy.

Darian Woods [08:37]: "The RFC was disassembled after the war... there wasn't a group of leaders able to keep the RFC going after Jones left."

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Legacy of the Reconstruction Finance Corporation

Though the RFC was dissolved, its legacy endures through several enduring institutions and practices:

• Fannie Mae and the 30-Year Mortgage: These innovations continue to underpin the housing market in the United States.

• Commodity Credit Corporation: This agency supports farmers by purchasing crops and providing loans, echoing the RFC's agricultural investments.

Chris Hughes [09:25]: "Parts of the RFC have endured, though we mentioned Fannie Mae and the 30-year mortgage earlier."

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Modern Parallels and Attempts at Revival

The ideologies and mechanisms of the RFC have resurfaced in modern times, with various administrations seeking to emulate its success in addressing economic crises.

• 2005 Loan Program under George W. Bush: Intended to finance clean energy projects, this program saw mixed results, including the infamous loan to Solyndra, which went bankrupt, and the successful investment in Tesla's electric vehicle factory.

Chris Hughes [09:41]: "Some of the institutions from the RFC survived, but this set of ideas actually comes up again and again in history."

These attempts highlight the persistent appeal of government-backed investment in critical industries, especially during economic downturns.

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Conclusion: The Enduring Dream of Government-Business Collaboration

The episode concludes by reflecting on the cyclical nature of government intervention in the economy. The “dream of your yo-yo factory” symbolizes the enduring hope that government support can revive struggling businesses and, by extension, the economy.

Waylon Wong [10:07]: "The dream of your yo yo factory lives."

Darian Woods [10:09]: "Darian yes, every banker has denied me credit, but this might be one way."

This historical perspective offers valuable lessons and considerations for contemporary economic policies, emphasizing the delicate balance between fostering growth and managing risks associated with government involvement.

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Notable Quotes:

• Chris Hughes [04:24]: "So the weekend that Roosevelt is inaugurated, he declares a bank 'holiday' all across the country and shuts down virtually all of the American banks."

• Chris Hughes [05:23]: "The RFC creates Fannie Mae, creates the 30-year mortgage to make it cheaper and easier for people to buy."

• Chris Hughes [06:17]: "If you get turned down, buy a bank for your business, walk down the street to the RFC, and we will give you an answer within days."

• Chris Hughes [09:41]: "Some of the institutions from the RFC survived, but this set of ideas actually comes up again and again in history."

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This episode provides a comprehensive overview of the Reconstruction Finance Corporation's role in American economic history, highlighting its innovative approaches to crisis management and its lasting impact on today's financial landscape. By drawing parallels to current government-business interactions, The Indicator encourages listeners to reconsider the dynamics of economic intervention and the potential benefits and pitfalls inherent in such collaborations.

Transcript

[NPR]

Npr.

[Darian Woods]

This is the indicator from Planet Money. I'm Darian Woods.

[Waylon Wong]

And I'm Waylon Wong. I don't know about you, Darian, but lately I've been seeing some things in the news that have shaken my idea of what it means to do business in America.

[Darian Woods]

Are you talking about Zoran Mandani's idea of opening government owned grocery stores in New York City?

[Waylon Wong]

Well, that definitely got tongues wagging, I will say. And then just this month, the Pentagon acquired a stake in a rare earth mining company. And that's after the government took what's called a golden share in US Steel.

[Darian Woods]

The quintessential American economic myth is that the free market, not the government, decides which businesses deserve investment and a shot of success. Now we see the Trump administration becoming a partial owner in private businesses.

[Waylon Wong]

And this is actually history repeating itself. The US Used to have a national investment bank. This was a government run entity that took on different forms during its life. It bought up stakes in private banks and developed new manufacturing industries. It even created the 30 year mortgage.

[Darian Woods]

Economist Chris Hughes has studied the history of this bank.

[Chris Hughes]

It's sort of shocking how few people know that we had a national Investment bank for 20 years in the United States and and it was popular on both sides of the aisle. Started by a Republican and incredibly helpful in getting us out of the Depression and then in preparing us for the war effort and it fizzled.

[Waylon Wong]

Today on the show, Chris tells us the story of this bank. How it helped shape the American economy during crucial moments of history and how we still see remnants of it today.

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And [e-mail] this message comes from Dell Technologies. Supercharge your studies during Dell's back to school event with AI PCs starting at 749.99 like the Dell 14 plus featuring an Intel Core Ultra Processor. Shop [e-mail] deals In January 1932, the.

[Waylon Wong]

US was in the throes of the Great Depression. President Herbert Hoover and Congress created a new bank like institution called the Reconstruction Finance Corporation or the rfc. And it had a mission that at the time was relatively novel for the government. It would extend emergency credit to businesses in danger of going bankruptcy.

[Darian Woods]

President Hoover assembled a board of directors for this new entity, the rfc. One of the men he turned to was a Texas businessman named Jesse Jones. Chris Hughes is the author of a book called market the 100 year struggle to shape the American Economy. He describes Jesse Jones as a larger than life figure.

[Chris Hughes]

He was born in Tennessee, moves to Texas at a young age, starts investing, becomes a millionaire by 30. He's a man about town.

[Waylon Wong]

He would definitely have a podcast if he listened to lived today. When he would have a podcast, he.

[Chris Hughes]

Would have a podcast. But he had these interests in media and real estate and he is interested in public service.

[Waylon Wong]

That same year, 1932, Hoover lost the presidential election to Franklin Roosevelt in a landslide. But the RFC survived the change in administration and Roosevelt tapped Jesse Jones to run it.

[Darian Woods]

Chris says the RFC had three phases of its life. The first one was the emergency phase and it kicked in right as Roosevelt took office.

[Chris Hughes]

So the weekend that Roosevelt is inaugurated, he declares a bank quote unquote holiday all across the country and shuts down virtually all of the American banks. And so over the coming weeks and months, the RFC is working in conjunction with other, with other folks to recapitalize these banks.

[Waylon Wong]

This stabilizing role is reminiscent of what the Federal Reserve does. But the Reconstruction Finance Corporation went further than lending money to banks in trouble. It had the authority from the government to actually buy stakes in these banks. September of 1934, the RFC was a partial owner of half of the banks.

[Darian Woods]

In the U.S. but despite that massive investment into the banking system, the depression got worse and the RFC moved into its second phase of life.

[Chris Hughes]

As the depression gets bleaker and bleaker, they then began investing in all kinds of cutting edge industries. And at that point housing is actually the most important one for them to invest in.

[Darian Woods]

That's because the housing industry employed a lot of workers and of course it was building something that people needed. But Americans had to be able to afford these new homes. So the RFC took another step.

[Chris Hughes]

The RFC creates Fannie Mae, creates the 30 year mortgage to make it cheaper and easier for people to buy. And it creates.

[Waylon Wong]

So we owe the 30 year mortgage to the RFC. Indeed, this was a major legacy of the Reconstruction Finance Corporation and not only created the 30 year mortgage, it also created the market for trading government backed mortgages. A financial market that still exists today.

[Darian Woods]

And the RFC's second phase of life involved investing in agriculture and railroads. Plus it lent money to businesses that couldn't get credit from skittish private banks. Jones believed that these business loans would spur hiring and economic growth.

[Chris Hughes]

Jones goes on the radio and he's clear. If you get turned down, buy a bank for your business, Walk down the street to the rfc, and we will give you an answer within days.

[Darian Woods]

And that raises a topic that a lot of economists might tell you to worry about. Moral hazard. When people act recklessly because they know someone else is picking up the tab.

[Waylon Wong]

Were there conversations at the time about moral hazard and assessing risk and like, well, if a bank has decided that this small business sounds like a crummy business and why should taxpayer money go into a loan for a business?

[Chris Hughes]

Yeah, absolutely. And you can see it evolve over time. You know, in the beginning, they really want to avoid these kind of direct loans for this reason. They say, you know, we in government shouldn't be doing that. And then over time, they begin to provide. I mean, you could think of it as a kind of public option for banking that is more risk tolerant. They don't want it to be so risky that they're just passing out money to anybody who shows up. But they do think that they need to move the proverbial dial towards funding and taking more risk to get the economy going again.

[Waylon Wong]

You could have gotten funding for your yo yo factory, Darian.

[Darian Woods]

How did you know about that?

[Waylon Wong]

How did I know about the yo yo factory?

[Darian Woods]

I'm trying to keep a secret. Before the great launch.

[Waylon Wong]

The Second World War really got the US economy going, no thanks to Darien. And this era is when the Reconstruction Finance Corporation enters its third phase of life. It financed American airplane manufacturing and training schools for pilots.

[Darian Woods]

The RFC also invested in something that the US really needed for the war effort, but didn't make. Synthetic rubber used for, say, vehicle tires and tank treads. It designed and built 51 government owned rubber factories. It also leaned on existing rubber and chemical companies to share research secrets so that they could make rubber even faster.

[Chris Hughes]

By 1944. So much. They've discovered not only how to make synthetic rubber, but how to do it in a cost effective way. And then we actually have a glut of it. By the end of the war, we.

[Waylon Wong]

Had too much rubber.

[Chris Hughes]

We had so much.

[Waylon Wong]

What did we do? We made a bunch of bouncy balls. What do we do?

[Chris Hughes]

That's a good question. I don't know.

[Darian Woods]

Chris says the RFC was disassembled after the war. He points to a couple of reasons. One was a broader push to downsize the government in the post war era. Another is that President Roosevelt fired Jesse Jones, this larger than life figure who headed the bank.

[Waylon Wong]

It turns out Jones had gotten into some high profile conflicts including with the owner of the Washington Post and the Vice President of the us. So Jones fell out of favorite with Roosevelt and Chris says there wasn't a group of leaders able to keep the RFC going after Jones left.

[Darian Woods]

Parts of the RFC have endured, though we mentioned Fannie Mae and the 30 year mortgage earlier. There's also the Commodity Credit Corporation, which is this agency that supports farmers by purchasing crops and making loans.

[Waylon Wong]

And Chris says there have also been attempts to do similar things as the rfc. President George W. Bush created a loan program under the Department of Energy in 2005. The idea was to finance clean energy projects and it continued during the Obama and Biden administrations.

[Darian Woods]

That program had a notorious flop with one of its loans that went to Solyndra, a solar panel company that went bankrupt but also lent money to Tesla to develop its electric vehicle factory in Fremont, California. And we've seen how much the company's grown since then.

[Chris Hughes]

It's not just that concretely. Some of the institutions from the RFC survived, but this set of ideas actually comes up again and again in history.

[Waylon Wong]

The dream of your yo yo factory lives.

[Darian Woods]

Darius yes, every banker has denied me credit, but this might be one way.

[Waylon Wong]

To get some this episode was produced by Cooper Katz McKim and engineered by Jimmy Keeley. It was fact checked by Julia Richie. Kate Concannon is our editor and the indicator is a production of npr.

[NPR]

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