The Role of Public Capital

There is an obvious reason why the New Deal is the model for the immense changes we need to address global climate change. The New Deal, and our response to the war that followed, were the only times in American history that we moved so fast, and so well.

In less than ten years, the New Deal transformed the United States from an immensely energetic but ramshackle and barely connected gaggle of regions into what would soon emerge as the wealthiest, most powerful nation the world had ever known, and the champion of freedom around the globe.

Most obviously, the New Deal succeeded in physically remaking the country. We all know the different litanies of public infrastructure built: the nearly 5,900 school buildings, the 325 new firehouses, the 400 post offices and nearly 400 airports; the 212 dams and canals, the 894 sewage plants, the 29,000 units of public housing, the 78,000 new bridges, the 381,000 miles of power lines, the quarter-million miles of road—the list goes on and on. And there was the physical environment restored: the 2.3 billion trees planted, the billion fish restocked into waterways, the 2,400 plant and tree nurseries established, the thousands of square miles of soil reclaimed.

Yet the New Deal was a moral revolution as well. It remade how we did things in America, leaving us—all of us—with new rights and responsibilities. We—our democracy—was to be the steward of the land around us.

Moral and material accomplishments aside, speed was an indispensable element in the original New Deal, just as it will be in a Green New Deal. The original New Dealers of the 1930s were acutely aware that they, too, faced an existential threat—to our democracy, and even to civilization itself. It was why Franklin Roosevelt remarked that if his program failed, he would be the last American president. Would-be demagogues and dictators and crackpots were all around. The rise of the Nazis and their allies brought a new and urgent threat from overseas to which many Americans were just as oblivious then as they are to the threat of climate change today.

The New Dealers understood that they would have to go fast to have any chance. One key instrument and the man who made it work have sunk into obscurity today, but both were indispensable at the time, and are worth recalling as we look for a new role for public capital. These were the Reconstruction Finance Corporation (RFC) and its director, a canny Texas businessman named Jesse H. Jones.

Moral and material accomplishments aside, speed was an indispensable element of the original New Deal, just as it will be in a Green New Deal.

The original Reconstruction Finance Corporation was not started by FDR or a New Dealer at all, but by President Herbert Hoover—and only at the insistence of the nation’s leading bankers. Two years into the Great Depression, the economic slide was becoming an avalanche. Consumer spending had fallen by more than 22 percent, and business investment was little more than a third of what it had been. The nation’s jury-rigged banking system was coming apart. In 1930 alone, 1,350 banks were compelled to close their doors, and the rate of failures continued to accelerate the next year.

In a meeting with Hoover, the nation’s financial magnates pleaded with him to restore the War Finance Corporation (WFC), which had been established to stabilize the economy during and after World War I. The WFC had been an unprecedented government intrusion into the private sector, purchasing war bonds but also lending money “to a wide variety of enterprises, including public utilities, electric power plants, mining and chemical concerns, railroads, and banks.” Now, the titans of American finance wanted it back. In December 1931, Hoover reluctantly gave in to the bankers’ request and asked Congress to create the Reconstruction Finance Corporation—a new War Finance Corporation, by another name.

“We are engaged in a fight upon a hundred fronts just as positive, just as definite and requiring just as greatly the moral courage, the organized action, the unity of strength, and the sense of devotion in every community as in war,” Hoover declared.

And yet, he could not pull the trigger. The RFC moved warily and secretively under his administration—the exact opposite of what was needed. The new agency made just $126 million in loans to 45 banks in the first two months of its existence—and over half of that amount went to just three large banks. At the same time, the RFC refused to give money to the Chicago municipal workers—including 16,000 schoolteachers—who had not had a paycheck in months and who were clubbed by the city’s cops when they dared to protest. Hoover insisted on a primitive form of “trickle-down” relief. RFC loans to banks, he believed, would permit them to loan to businesses, which would in turn put people back to work.

He did not detect that the methodology was flawed. Financial institutions tended to hold on to their government money, rather than circulate it through the economy. Already drowning in debt, taking on loans from the government only made them shakier still.

“For a fatal year and a half,” Morgan banker Russell Leffingwell later claimed, “the Reconstruction Finance Corporation continued to lend money to the banks on adequate collateral security and gradually bankrupted them in the effort to save them.”

By the end of the Hoover administration, in March of 1933, just $197 million in public works had been okayed by the RFC and only $20 million of that money had been spent. By the last morning of the Hoover administration, every bank in the country was about to shut its doors. The American economy had collapsed.

“The conception of the RFC, for which credit must be accorded to President Hoover, had been good, but it was a year too late. Even when it started, its board, for a time, was entirely too timid and slow to save the country from the disasters of 1932 and 1933.” This assertion, spoken with characteristic certainty, came from Jesse H. Jones, a disgruntled Democratic member of the RFC’s bipartisan board.

“A few billion dollars boldly but judiciously lent and expended by such a government agency as the RFC in 1931 and 1932 would have prevented the failure of thousands of banks and averted the complete breakdown in business, agriculture, and industry,” Jones concluded.

It was a lesson he would take to heart, when the new president made him director of the Reconstruction Finance Corporation.

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Library of Congress

Jesse H. Jones, director of the Reconstruction Finance Corporation

JONES WAS THE VERY archetype of the larger-than-life Texan legend, not least in that he hailed from somewhere else. Prosperous farmers in Tennessee, Jones’s extended family had moved to Dallas when he was a boy. In his early teens, he went to work for a cantankerous uncle who had built an empire in lumber. Jesse inherited the business, moved to Houston, and parlayed it into a fortune of his own in real estate, construction, finance, and banking. He would extend his construction business to Dallas, Fort Worth, and even New York during the building boom of the 1920s, erecting office towers and apartment buildings in Manhattan.

With the exception of William Ogden in Chicago, no single individual ever did as much to develop a major American city. It was Jones who led the drive to dredge the Houston Ship Channel, and transformed the inland city into a major port. He lured Texaco, Houston’s first major oil company, to town—and to another office building he had constructed. He built the city’s leading department store, its grandest movie palace, its finest hotels. He bought and housed its leading newspaper—and used it to fight the Ku Klux Klan.

Like so many future New Dealers, Jones entered national politics during the Wilson administration, when he became a director of the American Red Cross, in charge of providing medical aid and general relief and comfort to American and Allied soldiers. It was in Woodrow Wilson’s Washington that Jones first met Franklin Roosevelt, then assistant secretary of the Navy. Fifteen years later, with his nearly unerring eye for talent, FDR lit upon Jones as his new RFC chairman even before his administration got under way. Roosevelt had intended to dissolve the RFC, then seen as hopelessly corrupt and ineffectual. Jones convinced him not to, persuading him that it could be a key tool in the New Deal. In turn, FDR’s trust in Jones grew stronger. The Texan was one of the three key advisers Roosevelt worked with almost around the clock, to prepare the opening salvo of the Hundred Days and the New Deal: saving the banks.

Here was nothing of the “timid and slow” that Jones had deplored. After Roosevelt ordered a “bank holiday” to temporarily shut the doors of the financial institutions still open across America, Congress passed his Emergency Banking Relief Act in the space of just seven hours. FDR went on the radio in the first of his “fireside chats,” to explain to the American people—in less then 13 minutes—how banking works, how banks would reopen “as soon as examiners found them to be financially secure,” and how “I can assure you that it is safer to keep your money in a reopened bank than under your mattress.”

By March 15, just 11 days into the Roosevelt administration, over 70 percent of the nation’s banks had reopened, and Americans were lining up to put their money back into their vaults. But that still left some 2,000 banks that had to be reorganized before they could be judged sound again. The task fell largely to Jones and the 1,500 employees he now directed at the

Jason Schneider

burgeoning RFC.

The device Jones hit upon to make it happen was not to swamp the banks with new loans (and collateral demands), but to have them make preferred stock issues that the RFC would then buy up, bestowing them with new assets—and public confidence.

This came very close to nationalizing the nation’s banking system, particularly since the government could and did influence the banks’ lending policies as well as personnel. Crucially, Jones insisted that not just the wobbling banks but the largest, strongest New York banks issue preferred stock for the RFC to buy up as well, thereby imbuing the whole banking system with new public confidence. The RFC would, before it was through, pump over $1.1 billion—or about $18 billion in today’s money—into more than half of the country’s banks through these preferred stock purchases.

In insisting that all major banks issue stock to the government, Jones was establishing a precedent for the 2009 bank bailouts of the Obama presidency, which provided emergency funds to the threatened and the safe alike. But the New Dealers went well beyond the more conservative Obama officials in their semi-nationalization of the nation’s financial institutions.

There were many who thought the administration should have gone all the way. “I think back to the events of March 4, 1933 with a sick heart,” Senator Bronson Cutting, a liberal Republican from New Mexico who had supported FDR in 1932, wrote afterward. “For then … the nationalization of banks by President Roosevelt could have been accomplished without a word of protest. It was President Roosevelt’s greatest mistake.”

Yet the president had no clear legal authority to take over the nation’s banks, and such an attempt might well have resulted in a protracted court or congressional battle, at a time when the nation’s financial system needed to get back up and running in a matter of days. Restoring confidence in the banking system, in the American government, in democracy itself, were priorities that would not wait.

“For the government to be willing to buy stock in a bank and advertise to the world that it is a partner in that bank is the greatest compliment and source of strength that could come to any bank,” Jones wrote.

The strategy worked. Some 20 million depositors saw their savings saved. The vast majority of depositors even in failed banks eventually got their money back, thanks to New Deal reforms. In just nine months, the U.S. banking system had been reborn—and “BIG JESSE JONES” made the cover of Time magazine.

“There was no need of higher authority,” enthused Time, whose infatuation with Jones never dimmed, on the eve of World War II. “Not J.P. Morgan, not even Franklin Roosevelt could be of as much comfort to the public. To many a U.S. citizen great or small, if Jesse Jones says O.K., it’s O.K.”

During the 2008-2009 fiscal crisis, more than $360 billion was pumped into major financial institutions under the Troubled Asset Relief Program (TARP). But as The New York Times was already reporting in January of 2009, “few [banks] cited lending as a priority,” after getting their government bailout. Instead, “an overwhelming majority saw the program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.” PNC even used its TARP infusions to snap up another bank, National City Corp., at a bargain rate. Executive pay and bonuses soon shot up to record highs, despite efforts by President Obama to contain them through moral suasion.

Jesse Jones, director of the Reconstruction Finance Corporation, was one of the three key advisers FDR worked with almost around the clock, to prepare the opening salvo of the Hundred Days and the New Deal: saving the banks.

During their once-in-several-lifetimes opportunity, Jesse Jones and the Roosevelt administration insisted on quid pro quos. They succeeded in curbing bankers’ self-compensation, and prodded them to start lending again. Appearing at the annual convention of the American Bankers Association, in August of 1933, Jones bluntly urged his fellow moneymen to “be smart, for once. Take the government into partnership with you and then go partners with the President in the recovery program without stint.”

But bankers have smaller purposes than the government, and lending, under both the Obama and Roosevelt presidencies, was far from their first priority. Jones “nagged, begged, and bullied bankers to lend,” especially in “industries of the smaller and medium-sized type,” throughout the Great Depression. Unlike the Obama administration, however, the New Deal and the RFC called the bankers on their bluff—or their cowardice—from the start. In June of 1934, Roosevelt signed legislation—initiated in part by Jesse Jones, and crafted by lead RFC counsel Tommy Corcoran—that gave the RFC and the Fed the authority to make loans directly to businesses. Within four months, the RFC had loaned $30 million to private industry, providing money wherever and whenever it was needed most.

Within days of his inauguration, Roosevelt had the RFC lend $22.3 million to the Chicago Board of Education, to finally pay those long-suffering schoolteachers. When an earthquake struck Los Angeles, $13 million in low-interest RFC loans was rushed out to the coast to help small businessmen there rebuild. It was the urgency itself in such responses that helped convince Americans that the new president and the new administration got it, that they really were on the side of the forgotten man.

“No one must be allowed to suffer for a lack of food or clothing or shelter, or become mendicants, for the lack of credit for agriculture, business, and industry, small as well as large,” Jones told bankers to their faces.

Yet the RFC was much more than an early version of FEMA, much as that was needed. It also provided seed money for what proved to be some of the most lasting New Deal initiatives.

RFC loans funded the seminal farm subsidy system instituted by Agriculture Secretary Henry Wallace under the Agricultural Adjustment Administration (AAA). It was the RFC that funded Harry Hopkins’s Works Progress Administration (WPA) projects, and the mortgage subsidies from the Home Owners Loan Corporation and the Federal Housing Administration that helped keep millions of Americans in their homes. It was the RFC that funded the Rural Electrification Administration’s (REA) extension of cheap electrical power throughout the countryside—and the Electric Home and Farm Authority’s (EHFA) program to let farmers buy electrical appliances on credit. The thousands of EHFA credits averaged $150 a loan, enabled the sale of over one million electrical appliances, and turned a profit of $175,000—which went right back to the Treasury.

The RFC loaned to universities and schools, to cities and towns, and public authorities. It bought up municipal bonds and drove down the cost of borrowing. When a syndicate of 70 Wall Street banks made the only bid on a massive public works project in New York City, the RFC intervened to knock down the interest rates the banking cartel offered, saving the public $3.5 million, or about $55 million today. The same year, 1934, the RFC created the original Export-Import Bank, doing what it could to revive international trade.

The agency’s efficiency was undeniable. For all that it did, the RFC, at its height during the Depression, employed only 3,200 people, and spent only one-half of 1 percent on overhead.

How did we become the America that can’t even lay a few hundred miles of track without ruinous cost overruns and political gridlock?

Politically, Jones was just as invaluable to the president, a connection to both the business community “west of the Hudson” and the already powerful Texas delegation in the Congress.

“While the President knew I was on the conservative side, he frequently indicated to me that he thought my course a good antidote for the extreme liberals, a sort of balance, as it were,” Jones would write in his 1951 memoir, Fifty Billion Dollars. “He allowed me to run my job my own way and soon learned that the Congress liked the way we operated.”

“Jones and Roosevelt’s relationship was not just professional,” noted Jones’s biographer, Steven Fenberg. “They both liked to play cards, tell jokes, and exchange gossip.”

Many described Jones as a “conservative.” (Jones certainly did.) But when it came to economics, Jones epitomized the pragmatic liberalism of the New Deal. He repeatedly denounced great disparities of wealth and the concentration of corporate power as threats to American democracy, and he became close friends with such leading New Deal liberals as Corcoran and especially Harry Hopkins, Roosevelt’s other man of immediate action.

For all these reasons—and thanks to the marvelously flexible charter of the Reconstruction Finance Corporation itself—Jones found more and more jobs heaped upon him as the New Deal continued. In 1939, Roosevelt consolidated all of the federal government’s lending programs under his direction, making him the federal loan administrator—and in 1940, consolidated Jones in the cabinet as secretary of commerce. (“If jobs were wives, he would be the patriarch of polygamists … Jesse Jones is Biblically big,” Time would marvel.)

With World War II came a whole host of new responsibilities for the RFC. The agency was a natural for the speed required to meet the emergency: running the nation’s petroleum reserves, developing a synthetic rubber process, securing precious metals and other strategic war materials, financing munitions plants, and helping fund America’s allies through the Export-Import Bank.

As Jones noted in his memoir, the RFC got back every penny of the $10.5 billion it spent to fight the Depression, “without loss to the taxpayers,” and “with approximately $500,000,000 profits, after paying the Corporation’s operating expenses and a fair rate of interest on the money which it borrowed to finance this phase of its operations.” Of the further $34 billion the RFC authorized to spend on the war, all but $9.3 billion in “unrecoverable” losses—fired shells, crashed planes, sunken ships, etc.—was returned as well.

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Rich Pedroncelli/AP Images

An elevated section of the high-speed rail under construction in Fresno, California. In his first State of the State address, Governor Gavin Newsom announced that, while work would continue on the 171-mile Central Valley segment from Bakersfield to Merced, the rest of the system would be indefinitely postponed, citing cost overruns and delays.

AS A MODEL FOR A Green New Deal, both the advantages and the drawbacks of a new Reconstruction Finance Corporation seem obvious.

A self-sustaining, all-purpose bank for the executive branch, it was built for an emergency—and probably should not exist except in an emergency. (The creation of similar self-sustaining agencies by Robert Moses nearly brought New York City to ruin, long after the worthy purposes for which they had been created had been fulfilled.)

The RFC proved to be a flexible funding mechanism, able to deliver that crucial element of speed. Nothing would be more critical in a Green New Deal.

There have been many proposals for some sort of a national “green infrastructure bank” or “green investment bank.” The estimates of what sort of difference this might make vary widely. A green bank could be used to finance all sorts of different green-energy projects, which is where the RFC might be a useful model. The agency proved to be incredibly flexible in what it ended up doing, which was just about everything. Keep a bank or a railroad afloat, fund a works program, build a bridge, help victims of a natural disaster, pay schoolteachers, let a farmer buy a washing machine on credit, develop a synthetic rubber process, fight a depression or the worst war in human history—the RFC did it. A Green New Deal Bank would face the same variety of missions and challenges.

Robert J. Klee, former commissioner of the Department of Energy and Environmental Protection in Connecticut—the first state to develop an actual green bank, in 2011—has laid out all the different approaches that can and must be taken in order to reduce carbon. They include everything from planting wetlands to switching to carbon-free energy sources; from retrofitting our homes to inventing much of the technology still required.

But could an RFC-like agency exist and thrive today? While everything the RFC undertook had been authorized by some legislation or other, it was an amazingly independent agency by today’s standards, given its head as long as it brought in desired results. It’s almost impossible to imagine any agency remaining so free of regular congressional control, for so long.

The RFC, like the rest of the New Deal, had the incomparable advantage of taking the stage after three years of immediate and vivid crisis, a rapidly collapsing economy and social order. One of the most confounding aspects of the climate crisis, by contrast, is that it seems unlikely to ever gain that urgency in the public mind before it is too late.

For obvious reasons, efforts to build green banks and the like have been moving away from Washington, not toward it, since Hillary Clinton’s defeat. But at the state level, progress has also been painfully slow. The United States Climate Alliance cites California Lending for Energy and Environmental Needs (CLEEN) as the first green-bank prototype, begun back in 1994. Over the past 25 years, it has raised $860 million in private investments, to spend on $1.2 billion in clean-energy and water projects. New York’s green bank—the largest in the United States, according to the Alliance—began as a $1 billion fund to leverage private money, in 2013. Five years later, it had invested a total of $1.6 billion in clean energy.

These are all noble efforts, but proceeding at a Hooverian pace compared to what is needed. It may well be that there are just too many restrictions and regulations in place today—ironically enough—to facilitate the sort of “action, and action now” the original New Deal could bring to bear on the Great Depression. And we’re not even talking about the active Republican “wreckers” of the sort who, for instance, simply refused to build President Obama’s high-speed rail corridors in Florida, Ohio, and Wisconsin. Or the Democrats who destroyed chances for high-speed rail in California by turning the plan over to greedy contractors. How did we ever become the America that can’t even lay a few hundred miles of track without ruinous cost overruns and political gridlock?

Right now, only nine states and the District of Columbia have what might really be called green banks—California, New York, Connecticut, Hawaii, Nevada, Michigan, Rhode Island, and Maryland. Results from the few other national efforts to establish green banks—in Australia, the United Kingdom, and Japan, for instance—have been just as toddling.

Our current effort, at its petty pace, seems to make the case for a national agency all the more compelling. Certainly, as Klee notes, “[The] decarbonized world is an electrified world, and only works with an upgraded electric grid and transportation infrastructure.” Such a program, requiring so much money and coordination, will not get built without a major federal commitment. Klee insists that “states recognize” that “the future of energy and environmental policy is neither ‘command and control’ nor ‘market mechanisms,’ it is both.” But there are precious few states even taking up the fight, and “market mechanisms” promise to slow the pace down again.

If the past is any indication, and if speed is of the essence, change will have to come from federal leadership. But no Congress—no matter which party is in charge—and no federal bureaucracy, no state or city government, no citizens’ group, and no well-greased professional lobby will let a new RFC have anything like the leeway it did under Roosevelt and Jones. A green RFC will have to bring the federal government’s authority and unmatched financial resources to bear, but also find a way to incorporate mass participation and move with alacrity. It is impossible to think how this might be brought about, but it will have to be done.