THE RECONSTRUCTION FINANCE CORPORATION WAS CREATED BY CONGRESS WITHOUT
AUTHORITY GRANTED TO IT BY THE CONSTITUTION, AND ITS OPERATIONS HAVE. BEEN
BEYOND THE SPHERE OF GOVERNMENT
Following the Packers and Stockyards Act of 1921, the
next important venture of Congress way in creating (June 22, 1932) the
Reconstruction Finance Corporation, after the panic of 1929.
It was fashioned after the War Finance Corporation of the Wilson
administration. But the War Finance Corporation had been founded on the
principle laid down in 1819 (4 Wheaton, 316) by Chief Justice Marshall with
regard to a banking corporation. That is, to meet its own necessities: —
collecting taxes, transmitting money, issuing bonds — the United States
can create a corporation. Maryland, which was taxing the issues of the United
States Bank, contended that as neither bank nor corporation is
mentioned in the Constitution, it was beyond the power of Congress, to
set up either.
Bank Act under Sweeping Clause sustained
The last clause in the grants of power to Congress authorizes it to make all
laws which shall be "necessary and proper for carrying into execution the
foregoing powers, and all other powers vested" in any department or
officer of the Government. Under that language the Court held that it was for
Congress to determine whether it needed the assistance of a bank in performing
its governmental functions.
So it was for Congress daring World War I to determine whether a War Finance
Corporation was "necessary and proper" to the war effort under the
Operations of Corporation not governmental
But the Reconstruction Finance Corporation does not in any sense come within
the requirements stated. It was un constitutionally created and it has pursued
an unconstitutional course.
The first and most important activities of the Corporation were in
reconstructing the financial status of banks, railroads, and other corporations
threatened with collapse. Loans of the money of the taxpayees to banks,
railroads and other big concerns ran into the billions. But thousands of
individuals and businesses of small class had to suffer unaided the
consequences of the panic. Whether that distinction or discrimination was
warranted by a consideration of the relative importance to national stability
of the applicants for loans is not known. It probably was, for money enough did
not exist to "bail out" all that thus became involved in the
catastrophe, for which the practices of many banks were much blamable.
A dispatch from Washington in April, 1949, said that the Committee on
Organization of the Executive Branch of the Government, headed by ex-President
Hoover, had asked Congress "to put the Government out of the money-lending
business and eliminate 30 Federal agencies engaged in lending, including the
Reconstruction Finance Corporation." Some months later another dispatch
said that the proposal had been attacked by the Corporation as an
"excursion into the controversial field of political economy." Of
course, no bureau will "consent to death."
Reconstruction Finance Corporation departed from purpose
After the Corporation had enabled many forms of big money to recover their
financial balance, it went out through the wide world scattering the savings of
the people. Loans were made in South American countries and others for the
construction of highways, railroads, and public utilities.
Under the National Defense Clause it lies in the judgment of Congress, the
General Manager of the United States, as to whether the preservation of small
nations friendly to us and favoring the governmental philosophy for which we
stand, warrants the expenditure of American money for the protection of them
from subjugation by Communism, the openly avowed and aggressive enemy of
But the use of money for the uplift of lowly countries, and for the other
purposes mentioned, is without constitutional authority.
From time to time it was reported that a bank or a railroad or some other
borrower had paid its loan, but there were many that never settled. In the
report of the Corporation for 1948, the 17th year of operation, it is shown
that $85,000,000 was held to meet "estimated losses in collection."
If that estimate was calculated on the record of previous years, then its
losses of the money of the taxpayers have been colossal.
The spender going stronger than ever
The United States News of October 7, 1949, reported from Washington that,
instead of going out of action, as the Hoover Committee believed it should do,
the Corporation disclosed that "its loans to business have reached an
all-time high, and applications still are being received in increasing
number." It reported, on October 21, loans to business — not to aid
Government in its functioning — as $416,000,000 to 5,400 borrowers, with
1,200 new applications a month.
"The trend is sharply upward," says the report, because the
commercial banks are becoming "choosey." That is, they are backing
out of the field which they should have fought from the beginning to hold, and
leaving it to the unconstitutional occupancy of Government.
The Associated Press reported on November 9, 1949, that Senator Fulbright of
Arkansas, chairman of a subcommittee of the Senate on Banking, investigating
policies of the Reconstruction Finance Corporation, said in a conference with
the applicant for a loan of $44,000,000 that such a transaction would not be
"in accord with RFC objectives." To newsmen after the conference he
said that he did not think it "proper to hand out public money to private
industry." He named three companies which had borrowed of the
Reconstruction Finance Corporation and "now are being run by the
That is what the corporation of Fascism is for — to take over private
Another press report said that the applicant had already borrowed from the
In May, 1950, the Associated Press reported from Houston, Texas, that Jesse
Jones, who had for many years managed the Reconstruction Finance Corporation,
said in his newspaper:
"If you have any old loans that you would like to get rid of, you may
sell them to the RFC — that is, if they are big enough and not sound
And in the next month a corporation to which RFC had loaned $37,500,000
defaulted, was put in receivership by a Federal court in Columbus, Ohio, and at
the receiver's sale the RFC made a bid of $6,000,000 more of the money of the
taxpayers to get control of the assets of the borrower.
At the same time a committee of the Senate was looking into the loan record
of the RFC, basing its action on reports of lendings "to new ventures
speculative in character." It is for banks, not government, to lend money.
Every youth coming out of school, and every graduate from the assembly lines of
the universities, must be made to comprehend that the grant of power to
Congress by the Constitution "to lay and collect taxes ... to pay the
Debts and provide for the common Defence and general Welfare of the United
States" does not authorize (1) the creation of a corporation or ( 2) the
lending of the money of the taxpayer.
Government out of bounds will not return
Thus, when Government has once fixed its foot in the door, it does not
withdraw. That is a fact to cause grief in the mind of the constitutionalist
But greater grief comes from beholding the complete lack of understanding in
the man of business of what is being done to him and to his country! The
Government at Washington, having multiplied by bureaus the number of its feet
until it is a centipede, now has a foot in the door of many commercial and
industrial concerns; of agriculture, of banking, of building, of housing, of
relief, of the schools, and of many other interests not within its
Will their ignorance entitle men of business to pardon for having
contributed to the wreck of the Republic?
The 80th Congress, after lopping off some of the activities of the
Reconstruction Finance Corporation, continued it "to aid in financing
agriculture, commerce, and industry" — which are not of any
constitutional concern of the National Government.
How one Bank grew to thousands
It has been a long progress — or descent — from that first bank
for the needs of Government to all sorts of commercial banks in competition
with citizens in the banking fields — to 7,000 National Banks, to the Farm
Loan Banks, the Home Loan Banks, the twelve Federal Reserve Banks, the
Export-Import Bank, the World Bank, and others.
From what has been shown, it is dear that the Reconstruction Finance
Corporation has not been engaged in helping to carry "into execution the
foregoing powers" of the Government, as the bank was held to be doing in
the case decided by Marshall.
As statesmen and scholars and citizens long ago ceased to question whether
any act of Government is "in pursuance" of the Constitution, the
validity of the Act of 1932 creating this Corporation never was tested.
Irrigation by money of the taxpayers
In 1946 Federal aid was poured out in a flood to States and individuals; 50
million for milk and luncheons to schools; over 10 million for vocational
rehabilitation; 57 million for soil conservation (the cover of aid to
agriculture); 20 million for cooperative agricultural extension; over 10
million for general public health; over 9 million to control venereal diseases;
and 5 million to control tuberculosis.
Those subjects are under the police power of the States, no part of which
they yielded to the National Government, as they gave over coinage, treaty
making, and some other nonlocal subjects by section 10 of Article I. As
elsewhere shown by authority, the police power cannot be abdicated by the
States nor usurped by the Nation. In the instances just before given, the
course taken by Washington was usurpation and therefore unconstitutional.
Following the Reconstruction Finance Corporation came the Tennessee Valley
Authority, the first step in "the electrification of America," a
string of loan banks and credit corporations, and many other corporations
having not the remotest relation to the constitutional functioning of the
Government of the United States.
How invalid legislation infects the courts
"For the purposes of this case," said Justice Stone, writing the
decision of the Supreme Court (306 U. S. 466) on a question whether the
salaries of employees of the Home Owners Loan Corporation were taxable by the
State of New York, "we may assume [italics inserted] that the
creation of the Home Owners Loan Corporation was a constitutional exercise of
the powers of the Federal Government." A text writer has already taken
that decision as settling the proposition that all those corporations were
constitutionally set up!
In creating the Home Owners Loan Corporation, Congress declared that it
"shall be an instrumentality of the United States." But it could not
be made so by a declaration if its functions were not to be governmental, as
the functions of the banking corporation were in the case arising in Maryland.
Congress gets power, not from its own declarations, but from the Constitution
only. Nor can its proclamation of an "emergency," like that in the
National Labor Relations Act, endow it with power not specified in the
This brief account of the origin and works of the Reconstruction Finance
Corporation shows the great danger of any break in the levee of the
Constitution. The flood will go beyond control. The damage to taxpayers and the
Republic by that Corporation is beyond estimate.
1. The argument of counsel for Maryland against the
constitutionality of the act creating the Bank of the United States was very
learned. The question was discussed pro and con by able men long after the
decision, In Jackson's administration a recharter was refused and the validly
of the decision by Marshall rejected. Senator Benton of Missouri leading the
opposition. In the light of the history of banking by the National Government,
with its failures, with its inflations and deflations, and with its operating
as the machine for manufacturing debt, one is justified in lamenting that it
did not from the first do its fiscal business with bankers, restricting its
activity in the field of finance closely to its granted power, "to coin
money and regulate the value thereof."
Next | Previous |
Contents | Text Version