The Young Fed

Mark Carlson describes The Young Fed as a history of the Federal Reserve’s early approach to emergency lending—what administrators and officials did, the choices they made, and what they learned from those choices. Yet as Carlson develops his narrative, he does more than recount institutional history. He uses his findings to address two broader questions. First, what lessons can contemporary policymakers draw from the Federal Reserve’s early experiences with lender-of-last-resort lending? Second, why was the Federal Reserve’s response to the banking crises of the Great Depression so ineffective? While both questions are important, it was the latter that I found more intriguing.

Drawing on a neglected archival source, Carlson distinguishes his work from other scholars who study the early Fed and who are also curious about its disappointing response to the bank crises of the Great Depression. Recovering and analyzing the stories from the Troubled Bank Survey Response (TBSR) Federal Reserve archive is Carlson’s unique contribution for advancing our understanding of how the process of making last resort loans developed and why the Fed’s actions in 1930–1933 were so problematic.

In 1927, the Board of Governors in Washington DC distributed questionnaires to the District Banks seeking assessments of their experiences assisting weak and overextended banks. The survey requested that Reserve Banks explain “whether in light of present knowledge you feel that the assistance given (over the past several years) was helpful to the bank and to the community served” and to identify “what constructive policies can be developed from experience with over-extended banks” (p. 11). The case studies generated by these responses form the backbone of Carlson’s analysis and comprise about one-third of the book. They’re fun to read.

For instance, who among us hasn’t known someone like Mr. E. Read, manager of the First National Bank in Shenandoah, Iowa, in 1924? The Fed officials who responded to Read’s request for emergency funding described him as “a shrewd person who is good on making promises but short on fulfilling them. . . . On every doubtful loan, he has some story of how it is going to be finally paid, but it is always smothered amid a mess of hazy details” (p. 109). If you’re not a theoretician, and you jump straight to Chapter Five where the case studies reside, simply reading the stories will improve your understanding of the process of last-resort lending.

However, once past the delightful novelty of the case studies, Carlson deftly analyzes them by tracking evolving attitudes toward emergency lending through a series of revealing examples. Noting why it was willing to extend emergency funding in 1921, an official at the Federal Reserve Bank of Minneapolis argued:

Some of these banks will not get back to a safe condition for several years. Some banks have borrowed far in excess of a proper line, and we have granted it. We felt that it was wiser in the long run to prevent a member bank from failing than to permit it to close with the probability that it might drag down strong banks with it. I feel we are justified by reason of the necessity of maintaining banking stability and public confidence (p. 142).

This perspective emphasized systemic stability and public confidence, even at the cost of extending credit to weak institutions. By the latter half of the decade, however, Reserve Banks had become noticeably more cautious. Carlson cites the Federal Reserve Bank of Dallas’s experience with the City National Bank of El Paso five years later in 1926:

The long drawn out and expensive litigation to obtain a full recovery of our loans led us to the conclusion that the resources of the Fed Bank could not be employed for the purpose of attempting to save banks but that they must be reserved and employed in the extension of credit as a purely banking function (p. 141).

The contrast is striking. Early in the decade, officials viewed emergency lending as essential to maintaining financial stability. By the late 1920s, many had become more concerned with limiting losses and protecting Federal Reserve resources. Expectations that the borrowers would quickly pay back Fed loans diminished and disappointment with inefficient banks increased. Carlson concludes that this shift in outlook helps explain why policymakers entered the Great Depression less willing to intervene aggressively than otherwise would have been the case.

Carlson’s findings complement rather than contradict the work of other scholars who have sought to explain the Federal Reserve’s ineffective response to the banking crises of the Great Depression. While I consider only a few studies here—and only those portions of the studies relevant to lender-of-last-resort policy—they provide useful points of comparison.

Allan H. Meltzer (A History of the Federal Reserve, Volume I: 1913–1951 [University of Chicago Press, 2003], 2–4 and 137–139) offers a political economy explanation. Drawing primarily on minutes of Board and district bank meetings, he argues that the compromise President Woodrow Wilson forged to secure passage of the 1913 Federal Reserve Act created an institution without a clear division of authority. While Wilson’s compromise balanced the interests of bankers and populists by granting oversight of the twelve district banks to the politically appointed Board of Governors in Washinton DC, power struggles and recurring conflicts ensued, particularly between Benjamin Strong, president of the New York District bank, and Board member Adolph Miller. Such disagreements slowed decision-making and contributed to the Fed’s reluctance to act aggressively during the banking panics of the Depression. The Banking Act of 1935 resolved much of this tension by concentrating authority in the Board of Governors, but by then, crucial delays in policy response had already occurred.

Michael D. Bordo and David C. Wheelock (“The Promise and Performance of the Federal Reserve as Lender of Last Resort, 1914–1933,” in The Origins, History, and Future of the Federal Reserve: A Return to Jekyll Island, edited by Michael D. Bordo and William Roberds, [Cambridge University Press, 2013], 59–98) take a similar political economy approach, finding failure in the 1913 Act to reform the American unit banking system that left thousands of banks vulnerable to localized shocks. They further note the political preference to maintain state-chartered banks alongside federally chartered ones that left many state-chartered banks outside the Federal Reserve System, unable to directly tap emergency loans during the crises of 1930–1933.

Robert Hetzel (The Federal Reserve: A New History [University of Chicago Press, 2022]) pursues a monetarist interpretation for why the Fed did not act forcefully in the 1930–1933 banking panics. He contends that Federal Reserve officials entered the Depression relying on two intellectual frameworks inherited from the 1913 era: the Gold Standard and the Real Bills Doctrine. These models assumed that maintaining gold convertibility and supplying short-term commercial credit would be sufficient to stabilize the financial system. Yet by the late 1920s, both assumptions had become increasingly outdated. The Gold Standard had been suspended at the start of World War One and a deepening financial system meant banks more frequently lent to customers for purposes beyond short-term Real Bills commercial needs. Drawing on the archives of fourteen contemporaneous economists, Hetzel argues that policymakers were slow to recognize how financial markets had evolved beyond the 1913 conditions envisioned by the Fed’s founders. The loss of two dependable models to guide Fed officials contributed to halting responses to the banking crises of 1930–1933.

Consistent with Hetzel’s argument, Barry Eichengreen and Andreas Kakridis (eds., The Spread of the Modern Central Bank and Global Cooperation 1919–1939 [Cambridge University Press, 2023]) find that few central banks that formed in the interwar period responded effectively to the crises of the Great Depression. In that same volume (“Ideology in the Interwar Years and Beyond,” 44), Harold James writes, “the interwar wave of central banking was made up of institutions that had grown up in the gold standard world but survived into an age of fiat currency.

In short, Carlson finds that pragmatism rooted in case-by-case, cost benefit analysis was the way the early Fed officials decided last-resort loan requests. As the decade progressed and many troubled banks required support for longer periods than officials had anticipated, officials gradually adopted a more cautious approach to requests for aid. Thus, the ultimate disciplinary mechanism of capitalism, losses, nudged officials to the new stance. By shining a light on the neglected TBSR archives Carlson advances our understanding of how Fed officials’ experience with last-resort lending evolved despite the vagaries in the Fed Act noted by Meltzer, Bordo and Wheelock and despite the fading relevance of the Gold Standard and Real Bills Doctrines to balance credit noted by Hetzel.

For readers who remain curious about how last-resort loan decisions were made before the Fed, Carlson provides a Technical Appendix about how Clearinghouse Associations organized emergency loans. A reference to how J. P. Morgan provided last-resort loans when clearinghouses were unwilling or unable to act would have provided readers with additional historical context, given that Morgan faced remarkably similar challenges but did not experience ex-ante oversight of his decisions (see, for instance, Jon Moen and Mary Tone Rodgers, Before the Fed: J. P. Morgan, America’s Lender of Last Resort [Cambridge University Press, 2025], 187–192). Morgan faced the same fundamental dilemma: how to use private resources to maintain or restore the public good of financial stability during periods of crisis.

Who will find this book valuable? Anyone seeking to understand how Federal Reserve officials have approached requests for emergency liquidity and how those decisions evolve as economic conditions and institutional contexts change. The case studies vividly illustrate the difficulties involved in deciding whether emergency lending would preserve financial stability or merely postpone inevitable failures. The dilemmas Carlson examines are not confined to the 1920s; they continue to confront policymakers today and are likely to remain enduring features of financial crises.