Construction of the Hoover Dam © U.S. Library of Congress (public domain)
Reconstruction finance is here understood as state financing strategies to guide economies out of major slumps following wars or economic crises. The quintessential application of reconstruction finance is what Keynes popularised in his ‘General Theory’ as response to the Great Depression and what later Keynesianism—following the interpretation of Hicks that led to the vastly influential IS-LM model—made out of it.
The notion of monetary and fiscal policy as states’ economic policy tools is a version of the triad, which became the key framework for analyses of reconstruction finance. This resulted in a flurry of Keynesian readings of the post-Great Depression period and the post-WWII era as a whole who identify deficit spending or central bank money creation as main policies facilitating historical reconstruction. Country-based studies yield similar triad-informed narratives: the post-Great Depression reconstruction in Germany was pinned on expansive fiscal policy through treasury borrowing and modest reduction in taxation, with similar dynamics in the UK and the US, where borrowing funded the New Deal.
Our case study looks at the centrality of OBFAs for reconstruction finance after the Great Depression and WWII. In the 1932 banking panic, when half of the US was on a bank holiday, the Hoover administration created the Reconstruction Finance Corporation (RFC) and Federal Home Loan Banks—OBFAs for reverting the financial cycle by granting elasticity. These institutions became a blueprint for New Deal OBFAs such as the Federal Deposit Insurance Corporation (FDIC) and the Exchange Stabilization Fund (ESF). In Germany, Chancellor Schleicher set up Deutsche Gesellschaft für öffentliche Arbeiten which issued work creation bills that could be discounted at commercial banks and rediscounted by the Reichsbank. It was the role model for the OBFA-financed public works programmes after 1933.
The post-1945 reconstruction, in the context of the Marshall Plan and the European Payments Union, was dominated by the German Kreditanstalt für Wiederaufbau (KfW), which was crucial for the German post-war economic miracle. British OBFAs such as the Industrial and Commercial Finance Corporation were only used in the decade from 1945 to 1955. In the US, the RFC was phased out in the late 1950s and not replaced with a similar public investment authority.