An Rfc For Today: A Capital Idea

The Democrats are ready for a national economic strategy. Felix Rohatyn's plan for a new Reconstruction Finance Corp. leads the debate.

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Felix Rohatyn is short, occasionally rumpled quick of tongue, and even quicker of mind. He does not fit the image of the globe-trotting financier. Nor, for that matter, do his liberal politics. But in his office high above Rockefeller Center in New York, this senior partner of Lazard Freres, an international investment banking house, makes deals between some of the world's most important companies and Plots the future of the Democratic Party.

It is this latter activity that makes Rohatyn a force with which to contend. The Austrian emigre is likely, according to some political observers, to become Secretary of the Treasury in the next Democratic Administration. And his policies could significantly affect how the United States does business. The reason, and the reason for Rohatyn's promineuce is embodied in the acronym RFC.

RFC stands for Reconstruction Finance Corp., the new Deal-era agency that Rohatyn, among others, wants to resurrect, albeit with significant changes. Supplysiders deride the idea as central planning; leftists vilify its creator as a corporatist. But one thing is clear: Democratic Party leadership is rallying around the belief that a national investment strategy is a given, and a mechanism for carrying it out, a must. Felix Rohatyn's plan, the most detailed and best known of those put forth, is at the center of the debate.

The original Reconstruction Finance Corp. was Herbert Hoover's last-ditch effort to help return the Depression-wracked United States to stability. Enacted in January 1932, it was initially designed to extend direct loans to only two industries -- financial institutions and railroads. The Hoover Administration was voted out before the RFC could be used effectively, but the bank flourished under Franklin Roosevelt and RFC chairman Jesse Jones, an influential and wealthy businessman from Houston. During the 12 years Jones ran the RFC, its powers were gradually broadened to allow it to make loans to mining companies, businesses, and disaster victims and for agricultural improvement and public-works construction. Eventually the RFC was authorized to buy the securities of any business enterprise. Finally, it got a blank check to take whatever steps the President and the Federal Loan Administrator thought essential to the war effort. Many of the U.S. war industries -- the basis for the spectacular growth of the U.S. economy after the war -- were financed by the RFC. After World War II, the RFC was put under tightening reins, and it was finally disbanded in 1954.

The RFC originally was capitalized with $500 million from the Treasury Department and could borrow $1.5 billion. This expanded to such an extent that by its demise, the RFC had raised and disbursed a total of $40.6 billion. In 1933, it accounted for over half of all federal spending and at one point employed 36,000 people in Washington, D.C., and 31 branch offices. And yet, unlike most government assistance programs, the RFC paid for itself. Interest income and other revenues covered losses and expenses, and when Congress closed its doors, the RFC returned $6 billion to the Treasury.

Felix Rohatyn first proposed a new version of the old New Deal agency in 1975. Rohatyn's experience as chairman of New York City's Municipal Assistance Corp. has convinced him that an independent body outside of government, business, and labor, but including representatives from each, could play a role in revitalizing the faltering U.S. industrial economy as successfully as MAC (chartered as a state agency) had helped to save New York from bankruptcy.

Recalls Eugene Keilin, MAC's first executive director and now a senior vice-president of Lazard Freres: "MAC came in and had the power to convene the parties, to bring them together in a room. It couldn't say, 'You must do this and that.' It made deals among the parties, in the form of concessions each of them would have to make in order to keep the operation -- New York -- going."

What distinguished MAC from a run -- of-the-mill mediator -- and made it the model for Rohatyn's RFC -- was that it had something to offer: capital. "It had the ability," says Keilin, "which the city did not have, and which for legal and maybe political reasons the state did not have directly, to borrow money and use it, first, to avert the city's bankruptcy, then to keep the city's operations and services continuing, and finally to provide for new capital spending."

This last function best characterizes Rohatyn's RFC. It would be a capital-targeting device; it could be called (despite its originator's vehement protest) a sort of central-planning agency. In any case, just as MAC could intervene in New York's economy by raising capital and disbursing it in loans and loan guarantees, the RFC would be a forum for intervention -- investment -- in the national economy.

A series of national investment bank proposals have been floated by various economists and policy formulators within the Democratic Party. All emerge from the understanding that the "free market" is a piece of American mythology and that the U.S. government has intervened in the operations of the marketplace in myriad ways, from the land grant acts of the nineteenth century that helped in settling the West to today's military procurement policies, which actively seek to bolster the industries and companies that supply the armed forces. If the government already intervenes, say these Democratic thinkers, best make that intervention coherent.

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