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The lender of last resort: lessons from the Fed’s first 100 years

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  • Mark A. Carlson
  • David C. Wheelock

Abstract

We review the responses of the Federal Reserve to financial crises over the past 100 years. The authors of the Federal Reserve Act in 1913 created an institution that they hoped would prevent banking panics from occurring. When this original framework did not prevent the banking panics of the 1930s, Congress amended the Act and gave the Federal Reserve considerably greater powers to respond to financial crises. Over the subsequent decades, the Federal Reserve responded more aggressively when it perceived that there were threats to financial stability and ultimately to economic activity. We review some notable episodes and show how they anticipated in several respects the Federal Reserve’s responses to the financial crisis in 2007-2009. We also discuss some of the lessons that can be learned from these responses and some of the challenges that face a lender of last resort.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-056.

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Date of creation: 2012
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Handle: RePEc:fip:fedlwp:2012-056

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Keywords: Federal Reserve banks ; Banks and banking; Central ; Discount window;

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References

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  1. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
  2. Murray, Roger F, 1971. "The Penn Central Debacle: Lessons for Financial Analysis," Journal of Finance, American Finance Association, vol. 26(2), pages 327-32, May.
  3. Christina D. Romer, 1991. "What Ended the Great Depression?," NBER Working Papers 3829, National Bureau of Economic Research, Inc.
  4. R. Alton Gilbert & Kevin L. Kliesen & Andrew P. Meyer & David C. Wheelock, 2012. "Federal Reserve lending to troubled banks during the financial crisis, 2007-10," Working Papers 2012-006, Federal Reserve Bank of St. Louis.
  5. Larry D. Wall & David R. Peterson, 1989. "The effect of Continental Illinois' failure on the financial performance of other banks," Working Paper 89-9, Federal Reserve Bank of Atlanta.
  6. Mark A. Carlson & Jonathan D. Rose, 2011. "Credit availability and the collapse of the banking sector in the 1930s," Finance and Economics Discussion Series 2011-38, Board of Governors of the Federal Reserve System (U.S.).
  7. Franklin R. Edward, 1999. "Hedge Funds and the Collapse of Long-Term Capital Management," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 189-210, Spring.
  8. Charles W. Calomiris & David C. Wheelock, 1997. "Was the Great Depression a Watershed for American Monetary Policy?," NBER Working Papers 5963, National Bureau of Economic Research, Inc.
  9. Kenneth Spong, 2000. "Banking regulation : its purposes, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 2000bria.
  10. Mark Carlson & Kris James Mitchener & Gary Richardson, 2011. "Arresting Banking Panics: Federal Reserve Liquidity Provision and the Forgotten Panic of 1929," Journal of Political Economy, University of Chicago Press, vol. 119(5), pages 889 - 924.
  11. Charles Goodhart, 1999. "Myths About the Lender of Last Resort," FMG Special Papers sp120, Financial Markets Group.
  12. Eichengreen, Barry, 1996. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," OUP Catalogue, Oxford University Press, number 9780195101133.
  13. Gary Richardson & William Troost, 2009. "Monetary Intervention Mitigated Banking Panics during the Great Depression: Quasi-Experimental Evidence from a Federal Reserve District Border, 1929-1933," Journal of Political Economy, University of Chicago Press, vol. 117(6), pages 1031-1073, December.
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Cited by:
  1. Douglas J. Elliott & Greg Feldberg & Andreas Lehnert, 2013. "The history of cyclical macroprudential policy in the United States," Finance and Economics Discussion Series 2013-29, Board of Governors of the Federal Reserve System (U.S.).
  2. Pistor, Katharina, 2013. "A legal theory of finance," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 315-330.
  3. Ben S. Bernanke, 2013. "A Century of US Central Banking: Goals, Frameworks, Accountability," Journal of Economic Perspectives, American Economic Association, vol. 27(4), pages 3-16, Fall.
  4. Bernanke, Ben S., 2013. "A Century of U.S. Central Banking: Goals, Frameworks, Accountability : a speech at the "The First 100 Years of the Federal Reserve: The Policy Record, Lessons Learned, and Prospects for the Futur," Speech 617, Board of Governors of the Federal Reserve System (U.S.).

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