Reviving the Old RFC?

In fashioning their own program to restore the faltering economy, Democrats have embraced an old concept that originated with a much-maligned Republican Administration. At their mini-convention in Kansas City, Mo., last month, they proposed a revival of the Reconstruction Finance Corporation, which was created by President Herbert Hoover and played a pivotal role in the Depression-era economy. Its purpose: to lend federal money to troubled companies, stave off bankruptcies and curb unemployment.

To many politicians and even some businessmen, the RFC is an idea whose time is coming back. In Congress there is more talk about reviving the RFC than at any time since the Nixon Administration's hotly disputed decision more than three years ago to provide a $250 million federal loan guarantee to ailing Lockheed Aircraft Corp. At a breakfast with reporters several weeks ago, House Speaker Carl Albert proposed 14 remedies for revitalizing the economy, and on his list was a new RFC. Texas Populist Wright Patman, chairman of the House Banking and Currency Committee, has long favored creation of an RFC-type agency called the National Development Bank, which would have a lending authority of around $20 billion.

Lately, some influential business voices have joined in the RFC chorus. Henry Ford II has suggested that the Government give "serious consideration" to a new RFC. Wall Street Investment Banker Felix G. Rohatyn, a partner in Lazard Freres & Co., recently called for a new RFC that could not only lend money to troubled companies but also invest in their stock; the agency would sell its holdings later--and possibly at a profit--when conditions improve. The Rohatyn plan has won public support from such members of the financial establishment as Gustave Levy, senior partner of Goldman, Sachs & Co., and former Federal Reserve Board Chairman William McChesney Martin.

Proponents of a new RFC envisage a superagency empowered to dispense economic aid on a grand scale, as the original certainly did. Established in 1932, when unemployment was crowding 20%, the RFC moved swiftly to assist agriculture and the faltering banking system. During the Roosevelt years, it financed thousands of public works projects, made loans to businesses and backed such Depression-bred agencies as the Commodity Credit Corporation, the Federal National Mortgage Association and the Export-Import Bank. From its inception through 1938, it disbursed $10 billion, recovered all of it, and earned a $500 million profit for the Government. It lost money during World War II but still wound up financing some $22.4 billion in war production. The Eisenhower Administration finally dismantled the RFC in the 1950s.

Distaste for Bailouts. The Ford Administration has thus far shown no interest in any RFC-type scheme. Alan Greenspan, the President's chief economic adviser, has a conservative's fundamental distaste for massive Government bailouts of big businesses. Around the time of congressional debate over the Lockheed loan guarantee in 1971, Greenspan complained that a new RFC would reach staggering proportions, encouraging inefficiency as vast numbers of private firms seek federal help.

In general, opponents of an RFC revival argue that much of the rescue work it was designed for 40 years ago is handled today by such existing agencies as the Small Business Administration or through ad hoc measures. One example: the increase in mail subsidies approved by Congress two weeks ago to help some ailing airlines deal with hard times. In a recent editorial, the Wall Street Journal charged that the idea of an RFC revival was "sillier than a WIN button" because it would only increase the Government borrowing that has helped put companies in a capital squeeze. Economist Henry Kaufman, a partner of Salomon Bros., a Wall Street brokerage house, argues that federal billions could best be used to finance projects offering a long-term return to the nation: developing energy resources, farming marginal lands and increasing productivity.

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