This article is the eighth in our new campaign, "The Decisive Battle in the War for the Republic, Put the Fed Into Bankruptcy; Create the Third National Bank."
This is a matter of intention. This wrecking of our economy didn’t happen overnight. As this LaRouche PAC series has been elaborating, it is the oligarchy’s central banking system as a whole that lies at the root of our crisis.
Decision followed decision to deregulate, deindustrialize, post-industrialize, and outsource the agro-industrial base of our country. But you, dear reader, were not part of that decision-making process. Now, rapid decisions must be made, but they will only be made with your willful participation as the 2022 elections must sweep out the bad and begin to open the door for what is made anew again.
Let us first preface what follows with a cautionary note: There is still a misplaced belief that our economic problems are "financial problems." For instance, that local businessmen, farmers and big corporations are hit with rising interest rates—which “temporarily disrupt” an otherwise "healthy" economic system. Or that firms wake up to discover that they had made bad investment decisions based on “distorted price information” and therefore cannot generate the expected returns.
Our reality today is instead captured in the “triple curve” that economist and statesman Lyndon LaRouche first presented in 1995.
This is no mere “corporate liquidity crisis”—even though the Covid lockdown came into play. This has been, most fundamentally, a collapse of physical productivity and production—as we have seen evolve over time, as crystallized in Lyndon LaRouche’s graph, with the collapse of the physical inputs and outputs of our agro-industrial economy.
Steering the Ship
It is with a Third National Bank and national credit that we put the country back together. So how does this national credit mechanism work?
First of all, as LaRouche PAC is emphasizing in this “Bankrupt the Fed” series, comes the intention. The intention of an aroused and informed American citizenry that it is our national credit that can and must be used to ensure the buildup of the physical economy of the nation. We will not take our hands off the tiller, or the wheel! It is not partisan or bipartisan. Our nation’s economic policies must be the embodiment of the Preamble of the U.S. Constitution—of the general welfare clause in particular.
We have also done this before. With George Washington and Alexander Hamilton; with Abraham Lincoln and his greenbacks. There is another example closer to our time which we will look at here. That of Jesse Jones and the Reconstruction Finance Corporation (RFC) (1932-1945). Jesse Jones was with the RFC from its creation by Congress in 1932, and became it chairman in 1933.
Created in the midst of what we know today as “The Great Depression,” the RFC was expanded to provide national credit, as U.S. banks were either closing their doors or—as with Wall Street, the City of London, the central banking system & Federal Reserve—were unwilling to productively lend into the U.S. economy, to even begin to serve our communities and citizens.
In today’s dollars, the RFC made roughly a trillion dollars of national credits available between 1933 and 1945 through a multitude of collaborative arrangements with commercial and community banks, railroads, farmers, enterprises, utilities, states, cities, and towns. It went on to then play an absolutely central role in coordinating and financing our industrial war mobilization that, along with our troops, won World War II. All told, the RFC lent $50 billion in the currency of the day. When commercial banks were underwater, when Wall Street refused to lend, the RFC was created and then was expanded to step up. And the credit issued by the RFC did not end up costing our nation or taxpayers a single red cent.
What the RFC Did
The overextended banks, large and small across the nation, and failing railroads—then the nation’s largest employers and our transportation lifeline, but sucked dry by decades of Wall Street predatory financing—were early beneficiaries of RFC national credit. In 1932, these institutions and companies were rapidly failing, with knock-on effects spreading unemployment, mortgage defaults, and bankruptcy into every community and household.
As the full breadth and depth of the crisis came to be understood, the RFC’s role was rapidly expanded, in part due to the leadership of Jesse H. Jones. Jesse Jones, a prominent Houston, Texas businessman and city-builder with only an eighth grade formal education, decisively won the confidence of the nation. He also very publicly urged America’s bankers and his fellow industrialists to step up with him and the RFC, to lend and rebuild, all across the then demoralized nation. He tells the story in Fifty Billion Dollars: My Thirteen Years with the RFC (1932-1945). In a personal meeting in which Jesse Jones sought JP Morgan’s and other Wall Street banker’s cooperation, JP Morgan told Jesse Jones that it was not their business to tell people what to do with their money. What money?! Alongside FDR and the famous Pecora Commission, Jesse Jones battled Wall Street’s oligarchical predators and held them at bay for a decade.
Recall that the rural bank failures of the 1920’s were followed by the 1929 stock market crash, and in September, 1931, by the surprise move of the Bank of England to jettison the gold standard. Americans were already fleeing into cash or gold. City of London and European foreign owners now dumped their U.S. securities, further collapsing railroad and other industrial stocks along with financial and municipal securities. In six weeks, 15 percent of the U.S. monetary gold holdings were loaded onto ships and sent overseas. By January, 1933, the U.S. banking crisis spread further into the large cities. All the banks in Michigan were closed by Governor William Comstock on Feb 14. Bank failures, desperate state-ordered limits on depositor withdrawals, and statewide banking moratoriums had already spread, engulfing the nation.
Jesse Jones lowered RFC interest rates on its loans to banks, railroads, farmers, business enterprises, states and municipalities; the RFC also relaxed the collateral requirements. Utilizing 31 “Loan Agency Offices” around the country and a total of 4,000 employees (until the war mobilization began in 1940, when staff grew to over 10,000), the RFC did its job because it knew its mission.
What Mission? The Power of National Credit Brought to Bear to Reorganize and Rebuild the U.S. Economy
*The RFC saved the U.S. banking system. In March 1933, the RFC was empowered by Congress to invest in preferred stock of the failing banks, thereby investing into the capital of those banks. As Jesse Jones reports, the program the RFC set up, “prevented the failure of the whole credit system.” The switch from loans to equity also gave every taxpayer a stake in the rescue. It also gave banks more time to recover, because there was no fixed date for repayment.
Though banks, small and large, initially feared admitting how broke they were, the RFC preferred stock program became enormous. By September 1934 the RFC actually owned stock in half the nation's banks. In January 1934, 14,000 banks qualified to join the new FDIC—Federal Deposit Insurance Corporation. (The FDIC was initiated under the Glass-Steagall Act of 1933.) By 1935, bank failures dropped to 32 and confidence in the U.S. banking system was being rapidly restored.
Bolstered by national credit via the preferred stock program, banks themselves began to lend once again to business enterprises, farmers, and so-forth. For the RFC, the preferred stock investments paid off and made profit while stabilizing the U.S. banking system and costing taxpayers nothing.
*The RFC, with national credit, saved the U.S. rail system. Loans to the failing railroads were collateralized by the failing railroads’ own bonds, stock and other financial instruments. How could this be wise? Because the railroads were not finished; they were required by the nation! But payments on loans to them by the RFC had to come before the payment of any dividends to plundering Wall Street. Railroad executives had to move out of New York and “onto the line” where their railroad was. Further, 75% of most railroad “work loans” had to go for rehiring furloughed labor. (The railroads generally had an inventory of new rails, ties and other supplies, but had run out of money to pay the workmen.)
The RFC financed new freight cars and other rolling stock. The railroads had been systematically looted and were shells of their former selves. So the RFC ‘bought’ the “equipment trust certificates”—the signed contracts for the delivery of thousands of railroad cars to the various contracting railroads—with the loans that allowed the railroads to pay for their rolling stock orders. When the railroads paid back their RFC loans, the railroads’ equipment trust certificates were torn up.
Recall that railroads were then, both directly and indirectly, the largest employers and transportation life blood of the nation—and that held for almost every town and city in the entire country. An extension of the RFC's authority was passed on January 31,1935, that allowed the agency to purchase railroad securities directly as well as lend in cases where funds were not available through private channels. The RFC was thus further enabled, to underwrite (stand behind) millions of dollars in bonds to railroad companies.
*Agricultural credit to save America’s farmers. In 1933, when cotton was sold at 9 cents or less a pound, FDR and Jones had the RFC lend 10 cents a pound on cotton to farmers. The farm rescue plan eventually became second only to the bank rescue plan, as Jesse Jones reports. Billions of dollars of loans were made to farmers to allow them to sell their crops and livestock “in an orderly manner, rather than rush them into distressed markets at harvest time. The whole agricultural economy of the country would have collapsed. It almost did in 1932.” The Commodity Credit Corporation was created under the RFC to do the lending of credit to farmers for a broad array of crops. For its first six years, the Commodity Credit Corporation operated under the direction of the RFC, which also organized its startup funds. The RFC, after carrying a “large paper loss” on “piled up mountains of cotton, wheat and other agricultural commodities,” eventually came out ahead on this program as well. Loans to drainage, levee, and irrigation districts were also financed under the Emergency Farm Mortgage Act.
* RFC Self-Liquidating Loans for national infrastructure projects, large and small. Included were the 244-mile-long Colorado River Aqueduct to the Los Angeles and San Diego areas of California, the San Francisco-Oakland Bay Bridge, three bridges across the Mississippi, canals, the Manhattan-to-Brooklyn under-river tunnel, and also thousands of smaller projects down to a $500 loan for a cannery set up by a school district in Texas. The term “Self-Liquidating projects” meant that the projects would be “self-supporting” and “solvent,” and return the costs of construction within a reasonable time. The RFC then assisted the Public Works Administration (PWA), the major funder of the large-scale infrastructure projects of the day. The RFC did this by purchasing construction bonds that the PWA accepted from counties and municipalities. By 1936, the RFC had purchased over $700 million in PWA bonds, thereby underwriting a host of public works projects undertaken by the agency. Private contractors and other private enterprises built these projects.
*State and City debt refinancing. The RFC could also purchase municipal bonds to help cities refinance their troubled debt. Banks wouldn’t help them. But the RFC, in turn, held onto the state and municipal debt taken as collateral, until markets improved. Among the big cities, Chicago, Detroit, and Cleveland were most afflicted by the collapse of the U.S. economy. However, the crisis was everywhere. Cities and states ran out of money. Teachers and municipal workers who had gone months or even years without pay, were finally paid. As part of an overall plan to loosen credit, bankruptcy laws were also rewritten to give municipalities and their elected officials greater latitude in refinancing and reorganizing to head off bankruptcy. As the overall economy recovered, the bond market and other financial activities came back, enabling the RFC to sell and more than cover overall costs.
*Rural Electrification was a creation of Senator George Norris (R-Nebraska), along with FDR and Jesse Jones. $40 million a year for ten years at 3% interest provided the originating loans, which provided the capital that in turn lent more than a billion dollars at low interest to cooperatives, municipalities, and other public and private entities to furnish electricity in rural areas. The citizens of rural America paid it all back through their utility payments. It did not cost a dime, quite the opposite; it increased the well-being and productivity of millions of Americans.
*Home Building. The loose amalgamation of “savings and loan” associations, into which families had invested so much, were likewise repaired. A national Savings and Loan system was built, which became the backbone of U.S. housing construction into the post-war period, up into the 1980’s. To expand housing construction, the Federal National Mortgage Association was organized to purchase mortgages, and operated under the RFC until 1950.
This is only part of the story of the Reconstruction and Finance Corporation (RFC). However, it is a lesson in what an actual Third National Bank and national credit can accomplish today. We don’t have time to report here on the efforts of the RFC and its dedicated staff, engineers, and advisers that went into victory in the World War II effort. You are encouraged to investigate for yourself. This time, we need a constitutional, permanent, Third National Bank as a permanent institution to replace the financial oligarchy and its central banking system once and for all.
We have work to do! We urge you to join us in our campaign for a Third National Bank and national credit today.