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Connectedness and ContagionProtecting the Financial System from Panics$
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Hal S. Scott

Print publication date: 2016

Print ISBN-13: 9780262034371

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034371.001.0001

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History of Lender of Last Resort in the United States

History of Lender of Last Resort in the United States

(p.79) 8 History of Lender of Last Resort in the United States
Connectedness and Contagion

Hal S. Scott

The MIT Press

The government successfully responded to the 2008 financial crisis through the Federal Reserve's use of its lender-of-last-resort (LLR) authority. The presence of a strong LLR is paramount to financial stability. The need for such a lender was the reason the Federal Reserve System was created. A strong and independent LLR is even more important than a strong and independent manager of monetary policy. A bad LLR policy could destroy the country in weeks, forcing huge losses of wealth and strong motives for revolt. This chapter discusses the creation of the First Bank of the United States (1791–1811) and Second Bank of the United States (1816–1836), federal banks that could loan to any borrowers, commercial as well as financial institutions, and ultimately foundered on the idea that it was improper for the US government to make loans to the private sector. It also details the creation of the Federal Reserve system in 1913 and its authority as LLR to nonbanks.

Keywords:   2008 financial crisis, financial policy, lender of last resort, Federal Reserve, First Bank of the United States, Second Bank of the United States, federal banks, monetary policy, financial stability

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