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.

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.

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.

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.

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.

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.

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."

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."

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.

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.

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."

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.