The Promise and Performance of the Federal Reserve as Lender of Last Resort 1914-1933

Michael D. Bordo, David C. Wheelock

NBER Working Paper No. 16763
Issued in February 2011
NBER Program(s):Development of the American Economy, Monetary Economics

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.

download in pdf format
   (308 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16763

Published: “ 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 .

Users who downloaded this paper also downloaded* these:
Bordo w14569 An Historical Perspective on the Crisis of 2007-2008
White w16825 "To Establish a More Effective Supervision of Banking": How the Birth of the Fed Altered Bank Supervision
Bordo w3011 The Lender of Last Resort: Some Historical Insights
Bernstein, Hughson, and Weidenmier w14422 Can a Lender of Last Resort Stabilize Financial Markets? Lessons from the Founding of the Fed
Blonigen, Davies, Waddell, and Naughton w10939 FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us