Crises Before and After the Creation of the Fed

Early Elias and Òscar Jordà of FRBSF write this nice short paper on the topic. A more detailed paper on similar lines was given by Micahel Bordo.

Mostly we compare the current recession to the Great Depression. This paper compares it to the Panic of 1907:

This year marks the 100th anniversary of the Federal Reserve System. Two of the Fed’s main duties are acting as lender of last resort in times of crisis, and promoting stable prices and full employment through monetary policy. Few would challenge the Fed’s recent record at controlling inflation. But many question the effectiveness of the Fed’s emergency response to the 2007–08 financial crisis and the recession associated with it. The Federal Reserve was itself born out of the Panic of 1907, a financial crisis that bears a striking resemblance to the one that occurred almost exactly 100 years later. This Economic Letter examines the Fed’s crisis management response in this historical context.

How history repeats/rhymes:

Can you identify when the following events took place? Early in the year, the stock of a nonbank financial institution widely used as collateral in certain transactions drops by more than half. At first, financial markets shrug it off. But, during the summer, with market distress apparently in check, two new financial challenges arise. Shortly after that, a nonbank financial institution fails and panic strikes financial markets. Meanwhile, a giant financial company is also in trouble, but considered salvageable. A deal is struck. Market participants bet that the rescue will keep other financial dominoes from falling. Disaster is avoided, but not without major damage to the real economy in the form of a protracted recession.

If you thought this scenario describes the 2008 financial crisis, you would be right. You would have identified Bear Stearns as the company whose stock took a hit early in the year, Fannie Mae and Freddie Mac as the two challenges that surfaced in the summer, Lehman Brothers as the nonbank financial institution that collapsed shortly after that, and AIG as the financial giant that was rescued. However, the scenario also describes events that took place a century earlier. Replace Bear Stearns with Union Pacific, Fannie Mae and Freddie Mac’s failures with the crash of copper prices and New York City bonds, Lehman Brothers with the Knickerbocker Trust Company, and AIG with the Trust Company of America, and you would precisely identify the panic of 1907.

The events surrounding both crises were remarkably similar. But the institutional responses to these events were vastly different. The lack of a central bank in 1907 meant there was no public lender of last resort. Instead, J. Pierpont Morgan, a private investor and founder of J.P. Morgan & Co., orchestrated the rescue effort in 1907. In 2008, it was federal government agencies, especially the Federal Reserve and the Treasury Department, that responded to the crisis.


There is a nice chart which shows number of countries in crisis in the decades since 1870s:

Recessions originating from a financial event were common in the late 19th and early 20th centuries. Many stemmed from banking panics. Figure 1 provides a global historical perspective. We calculate by decade the number of countries that experienced financial crises among a sample of 17 industrialized economies representing more than half of global GDP during the past 140 years (for details, see Jordà, Schularick, and Taylor 2012).

Figure 1 shows a notable downward global trend in the incidence of these highly disruptive events, with the conspicuous exceptions of the Great Depression and the Great Recession of 2007–09. In the United States, the rate of banking crises declined markedly after the 1913 creation of the Federal Reserve System. Other than the Great Depression and Great Recession, the only significant banking crisis of the past century was the savings and loan crisis. By contrast, ten significant banking crises occurred in the 19th century.

Overall having a Fed would have helped in 1907..Though many would diasgree


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