Felix G. Rohatyn. A new R.F.C. is proposed for business.
With the country sliding rapidly into what appears to be a serious recession, suggestions are being made to revive the Reconstruction Finance Corporation as part of an overall economic program. The Democratic leadership has proposed this step and has introduced the necessary legislation.
Revival of the R.F.C. as part of a plan to get the economy on its feet is desirable without any doubt. In the Depression years of the 1930's, the R.F.C. played an important role in providing liquidity to banks and key industries, thereby preventing failures and a deepening spiral of the economic downturn. However, simply recreating the R.F.C. to provide additional credit to borrowers otherwise unable to obtain it, would be to overlook key aspects of the actual role played by the agency and to ignore basic differences between the financial structure of United States enterprise then and now. If the R.F.C. is to be recreated, let it become a vital instrument of economic growth and not just another lender of last resort.
The R.F.C. itself was a revival, in this case a revival of the War Finance Corporation of World War I. It took place in January, 1932. It was charged with providing emergency facilities for banks and other credit institutions. It was also given broad authority to make loans to agricultural, commercial and industrial enterprises. The National City Bank letter of February 1932 stated: "The enactment of the R.F.C. Act of Jan. 22 is recognition by the Government of the interest of all the people in supporting the credit granting instituitions . . . and in bridging over the refinancing difficulties of the railways. . . ." It went on to say, "The object of the R.F.C. is to revive industry by receiving credit."
The initial funds for the R.F.C. were to consist of $500-million of capital subscribed to by the United States Treasury and the authority to raise an additional $1.5-billion through the sale of Government guaranteed obligations. Conceived initially as a defensive mechanism, the corporation was not perceived as a possible instrument for economic stimulation. It was only in 1933 that emergency banking legislation gave the R.F.C. the authority to purchase bank preferred stocks, thus enabling their capital base to be strengthened.
Of approximately $4-billion proposed R.F.C. expenditures for 1934, the largest portion, $1.4-billion, was earmarked for the purchase of bank preferred stocks. Eventually the R.F.C. expanded into other areas through subsidiaries such as the Commodity Credit Corporation, the Electric Home and Farm Authority, the R.F.C. Mortgage Company and the Federal National Mortgage Association. It also financed public works programs, made industrial loans and provided emergency relief.
By 1938, the R.F.C. had disbursed $10- billion, including approximately $4-billion to financial institutions, $1.5-billion to agriculture and $1-billion each to railroads and public works. The fears of many that the R.F.C. would become an instrument of creeping socialism or of state planning were unwarranted: a vast investor of public funds, the R.F.C. nevertheless was operated essentially along the lines of a private banking institution.
This brief review should be kept in mind when consideration is given to the role and the powers of a new R.F.C. in today's economic environment. Certain factors would appear to be the most obviously telling:
At every level of our economy our institutions are overburdened with debt. In the past 10 years the debt-equity ratio of individual corporations has gone from 25 per cent to 40 per cent. Inflation and the collapse of the equity markets has accelerated this trend.
The continued decline in the equity markets has resulted in 80 per cent of New York Exchange stocks presently carrying a multiple of less than 10 times earnings. A majority of such companies have market