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55-865: The Defense Plant Corporation ( DPC ), was an American subsidiary of the Reconstruction Finance Corporation , a government corporation run by the United States federal government between 1940 and 1945. To win World War II the United States and its Allied Nations needed massive war production . Many private companies did not have the capital funds to meet the wartime demand for buildings and equipment. Defense Plant Corporation provided financial support to state and local governments. Defense Plant Corporation also made loans to banks, railroads, mortgage associations, and other businesses supporting

110-632: A central bank , such as the US Federal Reserve bank , and raising additional capital. In a worst-case scenario, depositors may demand their funds when the bank is unable to generate adequate cash without incurring substantial financial losses. In severe cases, this may result in a bank run . Banks can generally maintain as much liquidity as desired because bank deposits are insured by governments in most developed countries. A lack of liquidity can be remedied by raising deposit rates and effectively marketing deposit products. However, an important measure of

165-459: A bank's value and success is the cost of liquidity. A bank can attract significant liquid funds. Lower costs generate stronger profits, more stability, and more confidence among depositors, investors, and regulators. The market liquidity of stock depends on whether it is listed on an exchange and the level of buyer interest. The bid/ask spread is one indicator of a stock's liquidity. For liquid stocks, such as Microsoft or General Electric ,

220-408: A case study of Mississippi , Vogt (1985) examined two areas of RFC funding: aid to banking, which helped many Mississippi banks survive the economic crisis, and work relief, which Roosevelt used to pump money into the state's relief program by extending loans to businesses and local government projects. Although charges of political influence and racial discrimination were levied against RFC activities,

275-453: A congressional committee, and he did not reintroduce the bill in subsequent sessions. Market liquidity#Banking In business , economics or investment , market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the price at which an asset can be sold, and how quickly it can be sold. In

330-411: A daily process requiring bankers to monitor and project cash flows to ensure adequate liquidity is maintained. Maintaining a balance between short-term assets and short-term liabilities is critical. For an individual bank, clients' deposits are its primary liabilities (in the sense that the bank is meant to give back all client deposits on demand), whereas reserves and loans are its primary assets (in

385-489: A liquid market, the trade-off is mild: one can sell quickly without having to accept a significantly lower price. In a relatively illiquid market, an asset must be discounted in order to sell quickly. A liquid asset is an asset which can be converted into cash within a relatively short period of time, or cash itself, which can be considered the most liquid asset because it can be exchanged for goods and services instantly at face value. A liquid asset has some or all of

440-474: A particular market price. Market makers seek to profit by charging for the immediacy of execution: either implicitly by earning a bid/ask spread or explicitly by charging execution commissions. By doing this, they provide the capital needed to facilitate the liquidity. The risk of illiquidity does not apply only to individual investments: whole portfolios are subject to market risk. Financial institutions and asset managers that oversee portfolios are subject to what

495-540: A steel forge and aluminum foundry . With the end of the war, the DPC ceased operations on July 1, 1945. Some companies funded: Reconstruction Finance Corporation The Roosevelt administration 's New Deal reforms expanded the agency, enabling it to direct disaster relief funds and provide loans for agriculture, exports, and housing. The RFC closed in 1957 when prosperity had been restored and for-profit private financial institutions could handle its mission. In total,

550-420: Is called "structural" and "contingent" liquidity risk . Structural liquidity risk, sometimes called funding liquidity risk, is the risk associated with funding asset portfolios in the normal course of business . Contingent liquidity risk is the risk associated with finding additional funds or replacing maturing liabilities under potential, future-stressed market conditions. When a central bank tries to influence

605-894: The Lend-Lease Act and general counsel of the Foreign Economic Administration , joined as well. Lauchlin Currie , formerly of the Federal Reserve Board staff, was the deputy administrator to Leo Crowley . The RFC established eight new corporations and purchased an existing corporation. Its eight wartime subsidiaries were the Metals Reserve Company, Rubber Reserve Company , Defense Plant Corporation , Defense Supplies Corporation, War Damage Corporation, US Commercial Company, Rubber Development Corporation, and Petroleum Reserve Corporation. These corporations helped fund

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660-562: The United States Treasury . To obtain more capital, it sold US$ 1.5 billion in bonds to the Treasury, which then sold them to the general public. In its first couple of years, the RFC needed a loan of US$ 51.3 billion from the Treasury and US$ 3.1 billion from the public. The RFC lent to solvent institutions that could not be sold to repay their existing liabilities but would be able to do so in

715-460: The subprime mortgage crisis are examples of illiquid assets, as their value was not readily determinable despite being secured by real property. Before the crisis, they had moderate liquidity because it was believed that their value was generally known. Speculators and market makers are key contributors to the liquidity of a market or asset. Speculators are individuals or institutions that seek to profit from anticipated increases or decreases in

770-472: The Defense Plant Corporation. The head of the Defense Plant Corporation was Jesse H. Jones , with Emil Schram and Sam Husbands . It would also offer oversight that factories were constructed, equipped, and operated. By the time it closed in 1945 it had funded over $ 9 billion into the wartime factories. The funds went to over 2,300 projects in 46 US states and in foreign countries. In most projects,

825-560: The RFC authorized over US$ 2 billion of loans and investments each year, with a peak of over US$ 6 billion authorized in 1943. The magnitude of RFC lending had increased substantially during the war. The Petroleum Reserves Corporation was transferred to the Office of Economic Warfare , which was consolidated into the Foreign Economic Administration , which was transferred to the Reconstruction Finance Corporation and changed to

880-563: The RFC from 1932 through 1941 was US$ 9.465 billion. Chairmen of the Board of Directors Administrators and Deputy Administrators The first RFC president was the former US Vice President Charles Dawes . He soon resigned to attend to his bank in Chicago , which was in danger of failing, and President Herbert Hoover appointed Atlee Pomerene of Ohio to head the agency in July 1932. The presidency of

935-490: The RFC gave US$ 2 billion in aid to state and local governments and made many loans, nearly all of which were repaid. In 1931, amidst the high rates of bank failure , deflation , and unemployment that characterized the Great Depression in the United States, Federal Reserve board member Eugene Meyer proposed the establishment of a government agency empowered to make loans to banks and businesses in critical sectors of

990-405: The RFC thus switched from a Republican to a Democrat . Hoover's reasons for reorganizing the RFC included: the broken health and resignations of Eugene Meyer , Paul Bestor, and Charles Dawes; the failure of banks to perform their duties to their clientele or to aid American industry; the country's general lack of confidence in the current board; and Hoover's inability to find any other man who had

1045-536: The RFC to create its own mortgage company to sell and insure mortgages. The Federal National Mortgage Association (also known as Fannie Mae) was established and funded by the RFC. It later became a private corporation. An Export–Import Bank was also created to encourage trade with the Soviet Union . Another bank was established to fund trade with all other foreign nations a month later. They eventually merged and make loans available to exports. Roosevelt wanted to reduce

1100-464: The RFC were no longer in demand. During the late 1940s RFC made a large loan to Northwest Orient Airlines earmarked for the purchase of ten Boeing Stratocruiser airliners. The loan became controversial, seen as a political favor to the Boeing Corporation, who supported the re-election campaign of President Harry S. Truman , and sparked a congressional inquiry. President Dwight D. Eisenhower

1155-442: The RFC's efforts, though in 1932, monetary conditions improved because the RFC slowed the decline in the nation's money supply. The original legislation establishing the RFC did not limit it to lending to financial institutions; it was also authorized to provide loans for railroad construction and crop lands. An amendment passed in July 1932 allowed the RFC to provide loans to state and municipal governments. The purpose of these loans

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1210-597: The US economy. Modeled after the War Finance Corporation , a government corporation that financially supported industries critical to the war effort during World War I, its purpose would be to stimulate economic growth in the United States and restore public confidence in banking and the economy. It would replace the National Credit Corporation , an agency created in 1931 to restore the liquidity of banks on

1265-647: The War Assets Corporation, and the War Assets Administration (the disposal function of the RFC was transferred to WAC on January 15, 1946, and to the WAA in March 1946) processed approximately 61,600 remaining World War II aircraft, Some 34,700 “utility“ type were sold for primarily commercial purposes, and 26,900 primarily combat types auctioned for scrapping. Most of the transports and trainers could be used in

1320-565: The War Assets Corporation. The War Assets Corporation was dissolved after March 25, 1946. Most lending to wartime subsidiaries ended in 1945, and all such lending ended in 1948. After the war, the Reconstruction Finance Corporation established five large storage, sales, and scrapping centers for Army Air Forces aircraft at the Albuquerque AAF , New Mexico ; Altus AAF , Oklahoma ; Kingman AAF , Arizona ; Ontario Army Air Field , California ; and Walnut Ridge AAF , Arkansas . Estimates of

1375-584: The War Damage Corporation provided for such insurance without compensation, but by express Congressional enactment Congress added §5(g) to the Reconstruction Finance Corporation Act, 15 USCA §606(b)(2) requiring that on and after July 1, 1942, the War Damage Corporation should issue insurance policies upon the payment of annual premiums. Under the terms of War Damage Corporation's charter an authorized capital stock of US$ 100,000,000

1430-605: The ability and was both nationally respected and available. Like the Federal Reserve, the RFC tended to bail out the banks that benefited the public the most. Butkiewicz (1995) shows that the RFC initially succeeded in reducing bank failures, but the publication of the names of loan recipients beginning in August 1932 (at the demand of Congress) significantly reduced its effectiveness, because it appeared that political considerations had motivated certain loans. Partisan politics hindered

1485-399: The agency made positive contributions and established a federal agency in local communities which provided a reservoir of experienced personnel to implement expanding New Deal programs. Roosevelt saw this corporation as an advantage to the national government. The RFC could finance projects without Congress approving them and the loans would not be included in budget expenditures. Soon the RFC

1540-466: The agency, and Jones turned the RFC into an empire with loans made in every state. Under the New Deal, the powers of the RFC were greatly expanded. The agency now purchased bank stock and extended loans for agriculture, housing, exports, businesses, governments, and disaster relief. Roosevelt soon directed the RFC to buy gold to change its market price. The original legislation did not call for identities of

1595-472: The approval of the President of the United States pursuant to §5(d) of the Reconstruction Finance Corporation Act or 1932, 15 USCA §606(b) for the purpose of providing insurance covering damage to property of American nationals not otherwise available from private insurers arising from "enemy attack including by the military, naval of air forces of the United States in resisting enemy attack". Prior to July 1, 1942,

1650-438: The banks receiving loans nor of any reports to Congress. This, however, was changed in July 1932 to make the RFC transparent. Bankers soon were hesitant to ask the RFC for a loan since depositers would become aware and begin to consider the possibility of their bank failing causing them to withdraw their deposits, a practice called bank running . The RFC also had a division that gave the states loans for emergency relief needs. In

1705-401: The brink of failure with loans funded by the interbank lending market . On January 22, 1932, the Reconstruction Finance Corporation Act was signed into law by President Herbert Hoover after being passed by Congress with broad bipartisan support. The Reconstruction Finance Corporation (RFC) began its operations on February2, 1932. Like the Federal Reserve, the RFC would loan to banks, but it

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1760-406: The civil fleet, with trainers disposed of for US$ 875 to US$ 2,400. The fighters and bombers were of little peacetime value, with a smattering being sold for conversions to useful civilian purposes like aerial firefighting (a mere handful survived such second careers to be preserved as warbirds preservation and exhibits in aviation museums ). After World War II ended, the type of loans provided by

1815-549: The development of synthetic rubber , the construction and operation of a tin smelter, and the establishment of abaca ( Manila hemp ) plantations in Central America . Both natural rubber and abaca (used to produce rope products) had been produced primarily in South Asia , which came under Japanese control during the war. The RFC's programs encouraged the development of alternative sources of these materials. Synthetic rubber, which

1870-423: The following features: it can be sold rapidly, with minimal loss of value, anytime within market hours. The essential characteristic of a liquid market is that there are always ready and willing buyers and sellers. It is similar to, but distinct from, market depth , which relates to the trade-off between quantity being sold and the price it can be sold for, rather than the liquidity trade-off between speed of sale and

1925-480: The gold value of the US dollar. In order to accomplish this, the RFC purchased large amounts of gold until a price floor was set. The RFC's powers, which had grown even before World War II began, further expanded during the war. President Roosevelt merged the RFC and the Federal Deposit Insurance Corporation (FDIC), which was one of the landmarks of the New Deal. Oscar Cox, a primary author of

1980-545: The government owned factories and leased them to private companies. Major factories built were aircraft manufacturing (50% of funds), tanks plants , nonferrous metals , machine tools , synthetic rubber , shipyards and boat yards. The largest project was $ 176 million for Dodge 's Chicago aircraft engine plant. The Dodge Chicago Plant manufactured engines for the Boeing B-29 Superfortress and Consolidated B-32 Dominator . The Dodge Chicago 1,545 acres with

2035-409: The higher its price and the lower is its expected return. In addition, risk-averse investors require higher expected return if the asset's market-liquidity risk is greater. This risk involves the exposure of the asset return to shocks in overall market liquidity, the exposure of the asset's own liquidity to shocks in market liquidity and the effect of market return on the asset's own liquidity. Here too,

2090-507: The higher the liquidity risk, the higher the expected return on the asset or the lower is its price. One example of this is a comparison of assets with and without a liquid secondary market. The liquidity discount is the reduced promised yield or expected return for such assets, like the difference between newly issued U.S. Treasury bonds compared to off the run treasuries with the same term to maturity. Initial buyers know that other investors are less willing to buy off-the-run treasuries, so

2145-416: The liquidity ( supply ) of money, this process is known as open market operations . The market liquidity of assets affects their prices and expected returns. Theory and empirical evidence suggest that investors require higher return on assets with lower market liquidity to compensate them for the higher cost of trading these assets. That is, for an asset with given cash flow, the higher its market liquidity,

2200-439: The long run. A main reason for such loans was to ensure that depositors got their money back. The Reconstruction Finance Corporation spent US$ 1.5 billion in 1932, US$ 1.8 billion in 1933, and US$ 1.8 billion in 1934 before dropping to about US$ 350 million a year. In August 1939, on the eve of World War II, it greatly expanded to build munitions factories. In 1941, it disbursed US$ 1.8 billion. The total loaned or otherwise disbursed by

2255-402: The newly issued bonds have a higher price (and hence lower yield). In the futures markets , there is no assurance that a liquid market may exist for offsetting a commodity contract at all times. Some future contracts and specific delivery months tend to have increasingly more trading activity and have higher liquidity than others. The most useful indicators of liquidity for these contracts are

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2310-404: The number of surplus airplanes ran as high as 150,000. By the summer of 1945, at least 30 sales-storage depots and 23 sales centers were in operation. In November 1945, it was estimated that a total of 117,210 aircraft would be transferred as surplus. Many thousands ended up sold or gifted by the US military to the air forces of friendly allies around the globe. Between 1945 and June 1947, the RFC,

2365-416: The price it can be sold for. A market may be considered both deep and liquid if there are ready and willing buyers and sellers in large quantities. An illiquid asset is an asset which is not readily salable (without a drastic price reduction, and sometimes not at any price) due to uncertainty about its value or the lack of a market in which it is regularly traded. The mortgage-related assets which resulted in

2420-421: The problems with the economy. Eugene Meyer , who had pushed for both pieces of legislation, after heading up an organization similar to the RFC during World War I , was a governor of the Federal Reserve, and chairman of the Board of the RFC. Essentially, the RFC was the "discount lending" arm of the Federal Reserve. The initial funding for the RFC came from the sale of US$ 500 million worth of stocks and bonds to

2475-409: The sense that these loans are owed to the bank, not by the bank). The investment portfolio represents a smaller portion of assets, and serves as the primary source of liquidity. Investment securities can be liquidated to satisfy deposit withdrawals and increased loan demand. Banks have several additional options for generating liquidity, such as selling loans, borrowing from other banks , borrowing from

2530-464: The tin and abaca programs were handled by General Services Administration . The Commodity Credit Corporation , which was created to help farmers, remained in operation. Another establishment kept in operation is the Export–Import Bank, which encourages exports. In 1991, Rep. Jamie L. Whitten (Democrat of Mississippi) introduced a bill to reestablish the RFC, but it did not receive a hearing by

2585-399: The trading volume and open interest . There is also dark liquidity , referring to transactions that occur off-exchange and are therefore not visible to investors until after the transaction is complete. It does not contribute to public price discovery . In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses. Managing liquidity is

2640-673: The war efforts. The Reconstruction Finance Corporation (RFC) was founded in 1932 by Herbert Hoover to help with the Great Depression , with the outbreak of World War II, it became a war department. Fund requests usually started with the United States Navy , United States Army , War Shipping Administration , Office of Production Management , the War Production Board , Maritime Commission or other war departments. The Reconstruction Finance Corporation had eight subsidiaries. Most requests for new factories and new mills were given to

2695-496: Was able to buy bank preferred stock with the Emergency Banking Act of 1933. Buying stock would serve as collateral when banks needed loans. This, however, was somewhat controversial because if the RFC was a shareholder than it could interfere with salaries and bank management. The Federal Deposit Insurance Corporation (FDIC) was later created to help decrease bank failures and insure bank deposits. The second main assistance

2750-497: Was designed to serve state-chartered banks and small banks in rural areas that were not part of the Federal Reserve System. Another distinction was that the RFC could make loans on the basis of collateral that the Federal Reserve and other lenders would not accept. The related Banking Act of 1932 , signed on February 27, broadened the Federal Reserve's lending powers, and gave it the power to make national policy to mitigate

2805-482: Was in office when legislation terminated the RFC. It was "abolished as an independent agency by act of Congress (1953) and was transferred to the Department of the Treasury to wind up its affairs, effective June 1954. It was totally disbanded in 1957." The Small Business Administration was established to provide loans to small business, and training programs were created. Several federal agencies took over RFC assets, and

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2860-473: Was not produced in the United States prior to the war, quickly became the primary source of rubber in the postwar years. The War Insurance Corporation was established December 13, 1941 by Act of June 10, 1941 (55 Stat. 249), was renamed the War Damage Corporation by Act of March 27, 1942 (56 Stat. 175), and its charter filed March 31, 1942. It had been created by the Federal Loan Administrator with

2915-624: Was provided, all of which was subscribed for by the Reconstruction Finance Corporation. The corporation was transferred from the Federal Loan Agency to the Department of Commerce by Executive Order #9071 of February 24, 1942, returned to the Federal Loan Agency by Act of February 24, 1945 (59 Stat. 5), and abolished by Act of June 30, 1947 (61 Stat. 202) with its functions assumed by Reconstruction Finance Corporation. The powers of War Damage Corporation, except for purposes of liquidation, terminated as of January 22, 1947. From 1941 through 1945,

2970-530: Was to farmers and their crop lands. The Commodity Credit Corporation was established to provide assistance. The agriculture was hit hard with a drought and machinery like the tractor. One benefit it provided to these rural cities was the Electric Home and Farm Authority, which provided electricity and gas and assistance in buying appliances to use these services. The mortgage company was affected as well since families were not able to make their payments. This led

3025-458: Was to finance projects like dams and bridges, and the money would be repaid by charging fees to use these structures. To help with unemployment, a relief program was created that would be repaid by tax receipts. The Presidency of Franklin D. Roosevelt increased the RFC's funding, streamlined the bureaucracy, and used it to help restore business prosperity, especially in banking and railroads. Roosevelt appointed Texas banker Jesse H. Jones to lead

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