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Reconstruction Finance Corporation: Definition & Effects

Instructor: Jason McCollom

Jason has a PhD.

In the depths of the Great Depression of the early 1930s, President Herbert Hoover created the Reconstruction Finance Corporation to restore business confidence. Learn about the effects of the program, and test your knowledge with a quiz.

Herbert Hoover and the Great Depression

There is a reason why the Great Depression is considered 'great.' By 1932, one in four Americans was out of work. Farmers lost money if they took crops to market. Cities teemed with beggars and homeless families. Traditional sources of relief, such as private agencies and local governments, quickly had their resources overwhelmed, their money spent, and their staff stretched to the limit. In times such as these, it is natural for people to look their leaders and elected officials for assistance. The president at the time, Herbert Hoover, moved to address the situation according to his personal philosophy.

Herbert Hoover.
Herbert Hoover.

Before becoming president in 1929, Hoover was a respected engineer and businessman. As president, he promoted a philosophy of cooperative individualism, which suggested public-minded citizens would voluntarily help each other during crises. Businesses would also step up and provide help to those in need without being forced to do so by the government. Hoover argued that 'direct government assistance to individuals undermined their initiative and destroyed their moral fiber'.

With this approach in mind, President Hoover first met with business and labor leaders and urged them to take voluntary measures to address the deepening economic crisis. Hoover convinced employers to keep workers on the job and maintain production levels. In exchange, workers agreed to accept prevailing wages, hours, and conditions, and not go on strike. The deteriorating situation of the Great Depression, however, forced businesses to lay off workers in large numbers and cut production.

By early 1932, almost 25% of the entire workforce, or 15 million Americans, was unemployed. Stakeholder groups began pressuring Hoover to have the federal government provide direct relief for the destitute, unemployed, homeless, and suffering masses of the Great Depression. When Hoover resisted these calls for government intervention, The New York Times proclaimed: 'Hoover has 'failed as a party leader. He has failed as an economist…He has failed as a business leader…He has failed as a personality because of his awkwardness of manner and speech and lack of mass magnetism.'

Unemployed men queued outside a depression soup kitchen in Chicago.
Unemployed men queued outside a depression soup kitchen in Chicago.

The Reconstruction Finance Corporation

Eventually, the dire situation, and the fact that 1932 was a presidential election year, convinced Hoover decided to take more drastic measures, though direct relief did not figure into his plans. The Reconstruction Finance Corporation (RFC), which Hoover approved in January 1932, was designed to promote confidence in business. As a federal agency, the RFC loaned public money directly to various struggling businesses, with most of the funds allocated to banks, insurance companies, and railroads. Some money was also earmarked to provide states with funds for public building projects, such as road construction.

In making these loans, the government hoped businesses would hire additional workers, thereby creating economic growth and stalling the depression. Today, we would call the theory behind the RFC 'trickle-down economics.' According to the theory, if government pumped money into the top sectors of the economy, such as big businesses and banks, it would trickle down in the long run and help those at the bottom through opportunities for employment and purchasing power. Supporters felt the loans were a way to 'feed the sparrows by feeding the horses'; critics referred to the programs as a 'millionaires' dole.'

And critics there were: many noted that the RFC provided no direct loans to towns or individuals, and relief did not reach the most needy and those suffering the most. One of the most vocal opponents of the RFC, New York Senator Robert F. Wagner, asked Hoover why he refused to 'extend a helping hand to that forlorn American, in very village and every city of the United States, who has been without wages since 1929?'

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