Abolish the RFC

February 26, 1951

In the Feb. 19 Newsweek Raymond Moley dealt with the scandals that have developed in the Reconstruction Finance Corp.; but in the light of subsequent developments and of the wider issues involved, some further comment seems warranted here.

On Feb. 2 an investigating panel of the Senate Banking Committee, after months of inquiry, brought in a report charging improper use of the RFC’s lending authority, political and personal favoritism, and mismanagement. It was the practice of one director, the report found, “to give special attention to matters in which the [Democratic National] Committee was interested.” Other details, including the remarkable rise of an E. Merl Young, husband of a secretary to one of President Truman’s secretaries, from a $1,080-a-year messenger job, to a vice presidency of the Lustron Corp. (an RFC borrower) at $18,000 a year, and finally to an income of $60,000 in 1950, were recorded by Raymond Moley last week.

Though these factual findings were unanimously approved by the subcommittee, consisting of two Republican and four Democratic senators, Mr. Truman at a press conference dismissed the report as asinine. He followed this up by defiantly sending to the Senate the nominations of all five directors of the RFC—even though the last session of Congress had declined to take action on these nominations, and though three of the nominees were named by the Senate subcommittee report as having been unduly influenced in the grant of loans by individuals close to the President.

The subcommittee, however, apparently thinks that it would remove the political element from the RFC’s loans if the five-man board of directors were replaced by a single governor with complete responsibility. The blunt truth is that there is no cure short of the abolition of the RFC itself.

The RFC was set up in 1932 to perform a specific emergency function—to make loans to banks then under pressure, against sound assets which were not legal for rediscount at the Federal Reserve Banks. Once this emergency function was performed the RFC should have been liquidated.

On the contrary, it was not only retained but expanded, and was soon used for making direct loans to business. Such loans were bound to be economically unsound. A solvent and promising business, willing to pay the going rate for money, can obtain it from private lending institutions. Therefore, the firms that turn to the RFC for money must be either those who are unwilling to pay the going rate (already kept unsoundly low by the government’s cheap money policy) or those firms whose credit and prospects are not good enough to satisfy private lending institutions. The RFC, in fact, exists on the self-contradictory assumption that there are loans sound enough to risk the American taxpayer’s money in, though they are not sound enough for any private individual or institution to be willing to risk its own money in.

The $37,500,000 loan made by the RFC to the Lustron Corp, is typical of what happens under such an assumption. According to some estimates, the RFC will be lucky to get back 5 cents on the dollar from that “investment.”

It is argued that the RFC cannot be abolished now because it is needed to make “defense” loans to private business. This argument is without substance. Any solvent, well-managed corporation with a government contract in its hands should have no trouble in borrowing from private banks all the money it needs to fulfill that contract. But if we create a system under which private persons can get the funds from one government agency to set up facilities to solicit contracts from another government agency, we have created still further opportunities for political pressure and corruption. Even as matters already stood, as the Hoover Commission warned in a report on March 31, 1949: “Direct lending by the government to persons or enterprises opens up dangerous possibilities of waste and favoritism to individuals or enterprises.” The RFC should be abolished.