•  
  •  
 

Document Type

Case Study

Case Series

Broad-Based Emergency Liquidity

JEL Codes

G01, G28

Abstract

In the lead-up to the Great Depression, bank credit rapidly expanded and bank capital ratios declined. Banks, suffering from fallen commodity prices, failed at a high rate in the 1920s, and these failures rapidly accelerated in 1930. On January 22, 1932, the Reconstruction Finance Corporation (RFC) was created “to provide emergency financing facilities for financial institutions, to aid in financing agriculture, commerce, and industry, and for other purposes.” The original legislation gave the RFC broad authority to provide collateralized loans to almost any bank or corporation, especially small rural banks that could not access the Federal Reserve’s discount window and banks that were closed or in liquidation. Despite its broad authority, the RFC originally adopted narrow standards for its lending. However, Congress broadened its mandate in subsequent legislation, and the RFC loosened its criteria. As of July 1932, the RFC had extended loans to more than 4,000 banks, credit unions, railroads, and mortgage-loan companies. By the end of 1932, the RFC had extended credits totaling $2.3 billion and advanced $1.6 billion on those credits. President Herbert Hoover and the RFC’s board realized that the banks needed more capital in addition to temporary liquidity and shifted the bulk of the RFC’s support to a capital-injection program, which, combined with new federal deposit insurance, was more successful at stabilizing the banks. This case deals with the RFC’s role as a lender of last resort (LOLR) from its inception until President Franklin Roosevelt’s declaration of the March 1933 bank holiday.

Date Revised

2022-06-15

Download

Share

COinS