The New Deal and Recovery, Part 25: The RFC, Continued

George Selgin(This is the second installment of a three-part essay. The first part ishere.)Big Engines that Couldn ' tAlthough Hoover ' s Reconstruction Finance Corporation (RFC) was " more largely a banker ' s loan bank than anything else " (Ebersole 1933, 477), financial institutions were never the only firms eligible for its support. Railroads were an important exception from the start, though they were so mainly because financial institutions, commercial banks, and insurance companies especially, were railroads ' main investors. Thanks to New York and other state regulatory authorities ' inclusion of many railroad bonds among permissible investments for the banks and insurance companies they regulated, by 1932 those bonds made up 16 and 23 percent, respectively, of bank and insurance company assets (Mason and Schiffman 2002, 3).Until 1929, railroad bonds had a good reputation: some lines had paid dividends without fail for generations. Hence their bonds ' AAA ratings. But the depression hit railroads hard. Between 1929 and 1933, their operating revenues were cut in half, while their fixed charges, including the interest they owed on their debts, stayed roughly the same. Even railroads that had been paying dividends continuously for generations were forced to stop doing so, causing their bonds to be downgraded. The RFC ' s loans to railroads were supposed to help the financial industry by preventing railroads from defaulting on their debts, while sometimes helping the rail...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs