Central Banks, Global Shocks, and Local Crises: Lessons from the Atlanta Fed's Response to the 1920–21 Recession
During late 1920, the president (then called "governor") and board of directors of the Federal Reserve Bank of Atlanta were confronted with an unexpected, devastating collapse in the price of a commodity whose global production was concentrated in their district—cotton. Their judgment was that the fall in cotton prices was temporary and that its effects could be lessened with generous credit policies that did not conflict with the Federal Reserve Act. Other officials within the Federal Reserve System did not agree with this judgment, however, leading to a contentious policy debate and an eventual rollback of the Bank's policy accommodation.
- The Federal Reserve Bank of Atlanta independently engaged in widespread emergency lending during the 1920–21 recession, one of the first instances of such lending in the history of the Federal Reserve System.
- This policy led to a threat by the chair (then called "governor") of the Federal Reserve Board to forcibly downsize lending by the Federal Reserve Bank of Atlanta.
- The intra-Fed debate over the Federal Reserve Bank of Atlanta's emergency lending anticipated Great-Depression era debates that would lead to the 1932 passage of Section 13(3) of the Federal Reserve Act.
Center Affiliation: Center for Financial Innovation and Stability
JEL classification: E58, N12
Key words: Federal Reserve, emergency lending, 13(3)
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