Abstract

http://ssrn.com/abstract=2302842
 


 



The Federal Reserve and Financial Regulation: The First Hundred Years


Gary B. Gorton


Yale School of Management; National Bureau of Economic Research (NBER)

Andrew Metrick


Yale School of Management; National Bureau of Economic Research (NBER)

July 1, 2013


Abstract:     
This paper surveys the role of the Federal Reserve within the financial regulatory system, with particular attention to the interaction of the Fed’s role as both a supervisor and a lender-of-last-resort (LOLR). The institutional design of the Federal Reserve System was aimed at preventing banking panics, primarily due to the permanent presence of the discount window. This new system was successful at preventing a panic in the early 1920s, after which the Fed began to discourage the use of the discount window and intentionally create “stigma” for window borrowing – policies that contributed to the panics of the Great Depression. The legislation of the New Deal era centralized Fed power in the Board of Governors, and over the next 75 years the Fed expanded its role as a supervisor of the largest banks. Nevertheless, prior to the recent crisis the Fed had large gaps in its authority as a supervisor and as LOLR, with the latter role weakened further by stigma. The Fed was unable to prevent the recent crisis, during which its LOLR function expanded significantly. As the Fed begins its second century, there are still great challenges to fulfilling its original intention of panic prevention.

Number of Pages in PDF File: 33

Keywords: Federal Reserve, financial regulation, central banking

JEL Classification: E00, E50, G21

working papers series


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Date posted: July 30, 2013  

Suggested Citation

Gorton, Gary B. and Metrick, Andrew, The Federal Reserve and Financial Regulation: The First Hundred Years (July 1, 2013). Available at SSRN: http://ssrn.com/abstract=2302842 or http://dx.doi.org/10.2139/ssrn.2302842

Contact Information

Gary B. Gorton (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203 432-8931 (Fax)
HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Andrew Metrick
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
(203)-432-3069 (Phone)
HOME PAGE: http://mba.yale.edu/faculty/profiles/metrick.shtml

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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