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

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.