How did the Federal Reserve System take on this role for the US banking system? In his new book The Young Fed, Fed economist Mark Carlson looks back more than a century to the institution’s 1913 enabling legislation, which would soon be tested by the US economy’s roller coaster ride through the 1920s. He describes how the Fed’s wielding of its LOLR powers in that turbulent time shaped the institution and influences its operations to this day.

Introduction/​ In the first four chapters, Carlson explains essential concepts, albeit the discussion is scattered and disjointed across the chapters. To support weakened institutions during a crisis or panic, the Fed provides them liquidity (i.e., money, lent at high interest and secured by collateral) so the banks can continue operating and ease public fears. This typically is done through the “discount window,” a source of short-term lending. The trigger for emergency lending is an articulated concern by the Fed that a systemic event is imminent and that, without Fed lending, there would be severe economic consequences for the financial system. However, if the institution has more than short-term liquidity problems—that is, if there are idiosyncratic problems—those can be addressed by shuttering the institution or through other means such as restructuring.

The 1920s/​ Carlson sets the scene for the reader as to the state of the economy and the banking system for this most volatile of decades. The 1920s opened with an economic shock to US rural areas. As he explains, World War I

severely disrupted European agricultural production, and prices of agricultural commodities soared globally. US farmers bought more land, planted more crops, and raised more livestock amid expectations that the boom would last for some time or that prices might continue to rise.

As tends to happen with booms, there was a subsequent bust:

A significant portion of the expansion of farm activities was financed through borrowing. When European agriculture recovered far more quickly after the war than expected, prices of agricultural commodities collapsed and farmers struggled to repay debts.

Carlson then outlines the Fed’s policy response, which led to a historical event that financial journalist James Grant calls the “Forgotten Depression.” According to Carlson, “To combat an inflationary surge after World War I, the Federal Reserve tightened policy notably and likely contributed to the severity of the recession in 1920 and 1921.”

Case studies/​ The core of The Young Fed is chapter 5, by far the longest chapter in the book. It presents 14 case studies on lending (three city-level cases, for Boise, ID, Tampa, FL, and Havana, Cuba, and 11 individual bank-level cases). It is the most interesting of the chapters, assuming the reader has some curiosity about 100-year-old tales of banks approaching failure.

Most of the banks that were the subject of the case studies focused their lending on customers that previously flourished: citrus growers, cotton farmers, sugar producers, and cattle ranchers, among others. The case studies follow a standard template: Carlson introduces the bank, provides information on its assets and deposit size, the relevant geographic area (often a region experiencing an investment bust), and the bank’s regional interconnections with other banks. He then discusses the particular weakness of the bank that led to its problems, including a summary of the capability or incapability of the management team and its financial standing in terms of capital and liquidity; the extent of any deposit drain through runs on the institution that may have been triggered as part of the instability; the size of any Fed funding that may have been provided, including visual descriptions of piles of physical currency; if any losses were ultimately absorbed by the Fed; and speculation on whether the failure of the bank might lead to contagion.

It should be noted that most of these case-study banks were microscopic, even if their size is converted to equivalent 2025 dollars. Some of the banks ultimately failed even after receiving funding from the Fed. There were other cases where the Fed provided funding, replacing departing creditors that ran on the bank. Carlson often mentions the Fed’s motive in preventing a “disorderly” collapse, especially concerning interconnected institutions and regional panics. However, he never explains precisely what he means by “disorderly” or to what lengths the Fed should go to in pursuit of this goal. According to Carlson, some of the cases were deemed a success, but there is not much in the way of benchmarks for this conclusion. For example, a bank may have stayed open, but at what cost? On multiple occasions, he also gives the Federal Reserve credit for its “creativity” in structuring these resolutions. Carlson also speculates that there is evidence the actions of the Federal Reserve worked to “head off contagion…, preventing more widespread panics,” but no specific cases are cited to support this claim.

Where art thou, FRBNY?/ Those who have followed the booms and busts of recent decades know that during the recent global financial crisis, when investment bank Bear Stearns faltered in 2008, the Federal Reserve Bank of New York (FRBNY) rode to the rescue. As for commercial banks, the FRBNY supervised Citigroup, a major megabank that stumbled during the crisis, and the Federal Reserve System provided the institution with over $300 billion through Fed lending and other support programs. The question is whether the 1920s were dramatically different. Either there was no lending by the FRBNY during the 1920s, or the data are simply not available. Throughout the book, a detailed discussion (with relevant data) of the individual borrowers and lending operations of the FRBNY during the 1920s is notably absent. The Fed prides itself on being data-dependent and the FRBNY has always had a primary role in overseeing and supporting the US financial system. Thus, I believe a Fed economist such as the author should have done the work necessary to present any available FRBNY lending data and explain the circumstances around that lending or at least explain why there was a dearth of data in the case of the FRBNY.

Did the FRBNY act as a LOLR in the 1920s? Absolutely. A table in The Young Fed reveals that, in November 1920, the FRBNY had nearly $1 billion in loans outstanding to a sub-sample of 88 banks, but the book offers no individual bank data or case studies of that lending. In my book with James Freeman on Citigroup, we detailed how the FRBNY had loans of $144 million (about $3 billion today) outstanding to the current bank’s predecessor in early 1921. There is no detail on these significant loans in Young Fed. Citi was a megabank even back then and would have been systemic. This was at a time when that bank was, in the words of an internally commissioned history of the bank, “tottering” on the edge of failure.

A comment from Carlson regarding the uneven availability of data throughout the Reserve Banks is telling:

Certain Reserve Banks within the Federal Reserve System had more experience with emergency lending, and discussions of financial instability issues feature more frequently in the writings and correspondence of the officials at these institutions. There is much less information about how officials at other Reserve Banks thought about emergency lending.… Reflecting the locations of the stresses in the banking system and the availability of relevant information, this book deals mainly with the experiences of the Federal Reserve Banks of Atlanta, Chicago, Dallas, Kansas City, Minneapolis, and San Francisco.

There are available documents on emergency lending by the FRBNY in the Citi case and others during the 1920s. I believe Carlson should have provided more of the available details and explanations on these Reserve Banks, particularly in the case of the FRBNY given its importance in the financial system.

Conclusion/​ The final two chapters of The Young Fed look at more recent examples of the LOLR authority, including the “intervention to support Continental Illinois of Chicago in 1984.” Carlson discusses Fed lending to Continental, the outsized role of the Federal Deposit Insurance Corporation in this resolution, and the need to avoid a failure in a “disorderly manner.” In the last chapter, Carlson draws some final, abbreviated conclusions about this crisis management tool of the Fed.

The Young Fed provides the reader with a modestly interesting historical perspective with its contemporary case studies for small and medium-sized banks threatened with illiquidity and/​or insolvency during the financial instability of the 1920s. Unfortunately, the author rarely second guesses the Fed’s actions. Given the noted gaps in the data on lending to larger New York–based institutions, I believe the lessons that can be drawn from the book are rather limited given the small size (not systemic) and agricultural focus of the featured institutions. The book does not state outright in the affirmative that the Fed should try to stop every potential failure, but in nearly every case study in The Young Fed the Reserve Banks manage to find a justification to do so, even if it may not have been the prudent choice.

The FDIC has been relatively effective in quickly shuttering modest-sized banks such as those detailed in the case studies, particularly as the agency has had a lot of practice since the 1980s. As a result, the failure of many small to medium-sized banks today would be resolved without the angst that accompanied the failures of the 1920s and would not have cumulatively caused a systemic event. Now, if only the federal banking authorities would also have the courage to shutter large banks and megabanks without reliance on accompanying bailouts, such as in the case of Citigroup in 2008 and Silicon Valley Bank in 2023.

Readings

• Bagehot, Walter, 1873, Lombard Street: A Description of the Money Market, Henry S. King.
• Grant, James, 2019, Bagehot: The Life and Times of the Greatest Victorian, W.W. Norton.
• McKinley, Vern, 2019, “Would Bagehot Be Smiling?” Regulation 42(4): 59–61.