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The Federal Reserve and Financial Regulation: The First Hundred Years

33 Pages Posted: 30 Jul 2013  

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)

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Date Written: 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.

Keywords: Federal Reserve, financial regulation, central banking

JEL Classification: E00, E50, G21

Suggested Citation

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

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Andrew Metrick

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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