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The promise and performance of the Federal Reserve as Lender of Last Resort 1914-1933

Author

Listed:
  • Michael D. Bordo

    (Rutgers University and NBER)

  • David C. Wheelock

    (Federal Reserve Bank of St. Louis)

Abstract
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 failures, 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 failures 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.

Suggested Citation

  • Michael D. Bordo & David C. Wheelock, 2011. "The promise and performance of the Federal Reserve as Lender of Last Resort 1914-1933," Working Paper 2011/01, Norges Bank.
    • Handle: RePEc:bno:worpap:2011_01
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Michael D. Bordo, 2017. "An Historical Perspective on the Quest for Financial Stability and the Monetary Policy Regime," Economics Working Papers 17108, Hoover Institution, Stanford University.
    2. Bordo, Michael D., 2012. "Could the United States have had a better central bank? An historical counterfactual speculation," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 597-607.
    3. Michael D. Bordo & John V. Duca, 2020. "How New Fed Corporate Bond Programs Dampened the Financial Accelerator in the Covid-19 Recession," NBER Working Papers 28097, National Bureau of Economic Research, Inc.
    4. Kris James Mitchener & Gary Richardson, 2019. "Network Contagion and Interbank Amplification during the Great Depression," Journal of Political Economy, University of Chicago Press, vol. 127(2), pages 465-507.
    5. Monnet, Eric & bazot, guillaume & Morys, Matthias, 2019. "Taming the Global Financial Cycle: Central Banks and the Sterilization of Capital Flows in the First Era of Globalization (1891," CEPR Discussion Papers 13895, C.E.P.R. Discussion Papers.
    6. Renee Courtois Haltom & Jeffrey M. Lacker, 2015. "Should the Fed Have a Financial Stability Mandate? Lessons from the Fed's First 100 Years," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 49-75.
    7. Gary B. Gorton & Andrew Metrick, 2013. "The Federal Reserve and Financial Regulation: The First Hundred Years," NBER Working Papers 19292, National Bureau of Economic Research, Inc.
    8. Kris James Mitchener & Gary Richardson, 2013. "Shadowy Banks and Financial Contagion during the Great Depression: A Retrospective on Friedman and Schwartz," American Economic Review, American Economic Association, vol. 103(3), pages 73-78, May.
    9. Gary Gorton & Andrew Metrick, 2013. "The Federal Reserve and Panic Prevention: The Roles of Financial Regulation and Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 27(4), pages 45-64, Fall.
    10. Michael D. Bordo & Angela Redish & Hugh Rockoff, 2015. "Why didn't Canada have a banking crisis in 2008 (or in 1930, or 1907, or …)?," Economic History Review, Economic History Society, vol. 68(1), pages 218-243, February.
    11. R. Alton Gilbert & Kevin L. Kliesen & Andrew P. Meyer & David C. Wheelock, 2012. "Federal Reserve lending to troubled banks during the financial crisis, 2007-2010," Review, Federal Reserve Bank of St. Louis, vol. 94(May), pages 221-242.
    12. 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.
    13. Bazot, Guillaume & Monnet, Eric & Morys, Matthias, 2019. "Taming the gobal financial cycle: Central banks and the sterilization of capital flows in the first era of globalization," IBF Paper Series 03-19, IBF – Institut für Bank- und Finanzgeschichte / Institute for Banking and Financial History, Frankfurt am Main.

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    More about this item

    Keywords

    Federal Reserve Act; lender of last resort; discount window; banking panics; Great Depression;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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