The Promise and Performance of the Federal Reserve as Lender of Last Resort 1914-1933
This paper examines the origins and early performance of the Federal Reserve as lender of last resort. The Fed was established to overcome the problems of the National Banking era, in particular an "inelastic" currency and the absence of an effective lender of last resort. As conceived by Paul Warburg and Nelson Aldrich at Jekyll Island in 1910, the Fed's discount window and bankers acceptance-purchase facilities were expected to solve the problems that had caused banking panics in the National Banking era. Banking panics returned with a vengeance in the 1930s, however, and we examine why the Fed failed to live up to the promise of its founders. Although many factors contributed to the Fed's shortcomings, we argue that the failure of the Federal Reserve Act to faithfully recreate the conditions that had enabled European central banks to perform effectively as lenders of last resort, or to reform the inherently unstable U.S. banking system, were crucial. The Fed's shotcomings led to numerous reforms in the mid-1930s, including expansion of the Fed's lending authority and changes in the System's structure, as well as changes that made the U.S. banking system less prone to banking panics. Finally, we consider lessons about the design of lender of last resort policies that might be drawn from the Fed's early history.
|Date of creation:||Feb 2011|
|Date of revision:|
|Publication status:||published as “ The Promise and Performance of the Federal Reserve as Lender of Last Resort 1914 - 1933 ” with Michael D. Bordo, in The Origins, History, and Future of the Federal Reserve: A Return to Jekyll Island , edited by Michael D. Bordo and William Roberds , Cambridge University Press , 2013, pp 59 - 98 .|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David C. Wheelock, 1992. "Seasonal accommodation and the financial crises of the Great Depression: did the Fed "furnish an elastic currency?"," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-18.
- Timberlake, Richard H, Jr, 1984. "The Central Banking Role of Clearinghouse Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 1-15, February.
- Charles Calomiris, 1995. "The Costs of Rejecting Universal Banking: American Finance in the German Mirror, 1870-1914," NBER Chapters, in: Coordination and Information: Historical Perspectives on the Organization of Enterprise, pages 257-322 National Bureau of Economic Research, Inc.
- Barry Eichengreen & Michael D. Bordo, 2003.
"Crises now and then: what lessons from the last era of financial globalization?,"
in: Monetary History, Exchange Rates and Financial Markets, chapter 3
- Barry Eichengreen & Michael D. Bordo, 2002. "Crises Now and Then: What Lessons from the Last Era of Financial Globalization," NBER Working Papers 8716, National Bureau of Economic Research, Inc.
- Rolnick, Arthur J & Weber, Warren E, 1983. "New Evidence on the Free Banking Era," American Economic Review, American Economic Association, vol. 73(5), pages 1080-91, December.
- Vincent Bignon & Marc Flandreau & Stefano Ugolini, 2012.
"Bagehot for beginners: the making of lender‐of‐last‐resort operations in the mid‐nineteenth century,"
Economic History Review,
Economic History Society, vol. 65(2), pages 580-608, 05.
- Vincent Bignon & Marc Flandreau & Stefano Ugolini, 2009. "Bagehot for beginners: The making of lending of last resort operations in the mid-19th century," Working Paper 2009/22, Norges Bank.
- Perry Mehrling, 2002. "Retrospectives: Economists and the Fed: Beginnings," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 207-218, Fall.
- Wheelock, David C., 1989. "The Strategy and Consistency of Federal Reserve Monetary Policy, 1919–1933," The Journal of Economic History, Cambridge University Press, vol. 49(02), pages 459-461, June.
- Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, June.
- Michael D. Bordo & Owen Humpage & Anna J. Schwartz, 2007.
"The historical origins of US exchange market intervention policy,"
International Journal of Finance & Economics,
John Wiley & Sons, Ltd., vol. 12(2), pages 109-132.
- Michael D. Bordo & Owen Humpage & Anna J. Schwartz, 2006. "The Historical Origins of U.S. Exchange Market Intervention Policy," NBER Working Papers 12662, National Bureau of Economic Research, Inc.
- Rockoff, Hugh, 1974. "The Free Banking Era: A Reexamination," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(2), pages 141-67, May.
- John C. Williams & John B. Taylor, 2009.
"A Black Swan in the Money Market,"
American Economic Journal: Macroeconomics,
American Economic Association, vol. 1(1), pages 58-83, January.
- Claudia Goldin & Hugh Rockoff, 1992. "Strategic Factors in Nineteenth Century American Economic History: A Volume to Honor Robert W. Fogel," NBER Books, National Bureau of Economic Research, Inc, number gold92-1, October.
- Ben S. Bernanke, 1983.
"Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression,"
NBER Working Papers
1054, National Bureau of Economic Research, Inc.
- Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June.
- David C. Wheelock, 2010. "Lessons learned? comparing the Federal Reserve's responses to the crises of 1929-1933 and 2007-2009," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 89-108.
- Gorton, Gary, 1996. "Reputation Formation in Early Bank Note Markets," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 346-97, April.
- 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.
- Richard S. Grossman, 2010. "Unsettled Account: The Evolution of Banking in the Industrialized World since 1800," Economics Books, Princeton University Press, edition 1, volume 1, number 9219.
- Knodell, Jane, 2003. "Profit and duty in the Second Bank of the United States' exchange operations," Financial History Review, Cambridge University Press, vol. 10(01), pages 5-30, April.
- Michael D. Bordo & Angela Redish & Hugh Rockoff, 2011. "Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or ...)?," NBER Working Papers 17312, National Bureau of Economic Research, Inc.
- Wheelock, David C, 1990. "Member Bank Borrowing and the Fed's Contractionary Monetary Policy during the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 409-26, November.
- Bordo, Michael D. & Rockoff, Hugh & Redish, Angela, 1996.
"A comparison of the stability and efficiency of the Canadian and American banking systems, 1870–1925,"
Financial History Review,
Cambridge University Press, vol. 3(01), pages 49-68, April.
- Michael D. Bordo & Angela Redish, 1996. "A Comparison of the Stability and Efficiency of the Canadian and American Banking Systems 1870-1925," NBER Historical Working Papers 0067, National Bureau of Economic Research, Inc.
- Gorton, Gary, 1985. "Clearinghouses and the Origin of Central Banking in the United States," The Journal of Economic History, Cambridge University Press, vol. 45(02), pages 277-283, June.
- Michael D. Bordo, 1990. "The lender of last resort : alternative views and historical experience," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 18-29.
- Brian F. Madigan, 2009. "Bagehot's dictum in practice: formulating and implementing policies to combat the financial crisis," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 169-189.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16763. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.