For release on delivery
7:30 p.m. EDT
October 8, 2024
A History of the Fed's Discount Window: 1913-2000
Remarks by
Philip N. Jefferson
Vice Chair
Board of Governors of the Federal Reserve System
at
Davidson College
Davidson, North Carolina
October 8, 2024
Thank you, President Hicks and Tara Boehmler, for the kind introduction.1
Let me start by saying that I am saddened by the tragic loss of life, destruction,
and damage resulting from Hurricane Helene in North Carolina, and throughout this
region. My thoughts are with the people and communities affected, including those in the
Davidson College family. For our part, the Federal Reserve and other federal and state
financial regulatory agencies are working with banks and credit unions in the affected
area to help make sure they can continue to meet the financial services needs of their
communities.
I am happy to be back at Davidson College. This is a special community. I am
bound to it by a shared experience defined not by its length, but by its intensity. As I
visited with you today, and as I look around this hall, I see the faces of colleagues who
became dear friends during the COVID-19 pandemic. Back then, we spoke often about
the unprecedented uncertainty we faced. Amidst that uncertainty, however, we supported
each other on this campus. Now, looking back, we can attest that this mutual support was
vital. I am grateful to have been amongst you during that unprecedented time. Today, I
am proud to see that Davidson is stronger than ever.
I am excited to be here with you this evening and to talk to you about the history
of the Federal Reserve's discount window.2 The discount window is one of the tools the
Fed uses to support the liquidity and stability of the banking system, and to implement
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monetary policy effectively. It was created in 1913 when the Fed was established.
Today, more than 110 years later, this tool continues to play an important role. At the
Fed, we always look for ways to improve our tools, including our discount window
operations. Recently, the Fed published a request for information document to receive
feedback from the public regarding operational aspects of the discount window and
intraday credit.3
Today, I will do three things. First, I will discuss briefly my outlook for the U.S.
economy. Second, I will offer my historical perspective on the discount window, starting
in 1913 and ending in 2000. Finally, I will provide a few details about the request for
information the Fed recently published.
Tomorrow, I will say more about the discount window when I speak at the
Charlotte Economics Club.
Economic Outlook and Considerations for Monetary Policy
Economic activity continues to grow at a solid pace. Inflation has eased
substantially. The labor market has cooled from its formerly overheated state.
As you can see in slide 3, personal consumption expenditures (PCE) prices rose
2.2 percent over the 12 months ending in August, well down from 6.5 percent two years
earlier. Excluding the volatile food and energy categories, core PCE prices rose
2.7 percent, compared with 5.2 percent two years earlier. Our restrictive monetary policy
stance played a role in restraining demand and in keeping longer-term inflation
expectations well anchored, as reflected in a broad range of inflation surveys of
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households, businesses, and forecasters as well as measures from financial markets.
Inflation is now much closer to the Federal Open Market Committee's (FOMC) 2 percent
objective. I expect that we will continue to make progress toward that goal.
While, overall, the economy continues to grow at a solid pace, the labor market
has modestly cooled. Employers added an average of 186,000 jobs per month during
July through September, a slower pace than seen early this year. A shown in slide 4, the
unemployment rate now stands at 4.1 percent, up from 3.8 percent in September 2023.
Meanwhile, job openings declined by about 4 million since their peak in March 2022.
The good news is that the rise in unemployment has been limited and gradual, and the
level of unemployment remains historically low. Even so, the cooling in the labor market
is noticeable.
Congress mandated the Fed to pursue maximum employment and price stability.
The balance of risks to our two mandates has changed-as risks to inflation have
diminished and risks to employment have risen, these risks have been brought roughly
into balance. The FOMC has gained greater confidence that inflation is moving
sustainably toward our 2 percent goal. To maintain the strength of the labor market, my
FOMC colleagues and I recalibrated our policy stance last month, lowering our policy
interest rate by 1/2 percentage point, as shown in slide 5.
Looking ahead, I will carefully watch incoming data, the evolving outlook, and
the balance of risks when considering additional adjustments to the federal funds target
range, our primary tool for adjusting the stance of monetary policy. My approach to
monetary policymaking is to make decisions meeting by meeting. As the economy
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evolves, I will continue to update my thinking about policy to best promote maximum
employment and price stability.
Discount Window History
1913: The Fed was established
Now, I will turn to my perspective on the history of the discount window.
Understanding this history is important as we consider ways to ensure the discount
window continues to serve effectively in its critical role of providing liquidity to the
banking system as the economy and financial system evolve.
Before the Federal Reserve was founded, the U.S. experienced frequent financial
panics. One example is illustrated in slide 6 with a newspaper clipping from the Rocky
Mountain Times printed on July 19, 1893. It depicts panic swirling against banks at a
time when bank runs swept through midwestern and western cities such as Chicago,
Denver, and Los Angeles. The illustration shows how waves of panic hit public
confidence, the rocks in the picture, and how banks have a fortress mentality. They stand
strong against the panic, but they are not lending, and they are isolated.
Back then, the supply of money to the economy was inelastic in the short term, in
part because the monetary system in the U.S. was based on the gold standard. Demand
for cash, however, varied over the course of the year and was particularly strong during
harvest season, when crops were brought to the market. The surge in demand for cash,
combined with the inelastic supply of money in the short term, caused financial
conditions to tighten seasonally. The banking system was fairly good at moving money
to where it needed to go, but it had little scope to expand the total amount of money
available in response to the U.S. economy's needs. So if a shock hit the economy when
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financial conditions were already tight, then the banking system struggled to provide the
extra liquidity needed. Banks would seek to preserve liquidity by reducing their
investments and denying loan requests, for example. Depositors, fearful that they might
not be able to access their funds when they needed them, would rush to withdraw their
money. Of course, that caused the banks to conserve further on liquidity. In some cases,
they simply closed their doors until the storm passed. When banks closed their doors,
economic activity would contract.4 Activity would recover when the banks reopened, but
the economic suffering in the meantime was meaningful.
In addition to the supply of money in the economy being inelastic in the short
term, two prominent frictions, asymmetric information and externalities, made banks and
private markets vulnerable to systemic crises. Here, asymmetric information refers to the
fact that customers do not have access to all the information they need to evaluate
whether a bank is insolvent, illiquid, or both.5 Therefore, customers rely on imperfect
signals, such as news reports about another bank failing, to decide whether to withdraw
their money from their own bank.
Then there are externalities, in the sense that an individual bank may not consider
how an innocent bystander may be negatively impacted by its actions. When a financial
4
See, for example, Goodhart (1988).
5
Illiquidity is a short-term cash flow problem. An illiquid bank cannot pay its current obligations, such as
deposit withdrawals, even though the value of the bank's assets exceeds the value of its liabilities. In other
words, illiquidity means the bank does not currently have the resources to meet its current obligations.
With a short-term loan, an illiquid bank would be able to pay its obligations. Insolvency is a long-term
balance sheet problem. Total obligations of an insolvent bank are larger than its total assets. A short-term
loan would not help an insolvent bank. Of course, evaluating the quality of a bank's loan book in real time
to determine whether a bank is solvent can be extremely challenging during a crisis. In addition, in some
cases, illiquidity caused by large deposit withdrawals can lead banks to sell assets at fire-sale prices that
then impairs their solvency. Conversely, concerns about insolvency, even if unfounded, can lead to
liquidity problems. In the bank run literature, the connections between liquidity and solvency are a key
factor that gives rise to runs.
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institution fails, that may lead depositors to withdraw money from other unrelated banks,
which may in turn cause those banks to fail. Contagion can transform a single bank
failure into a systemic crisis, where many banks fail, credit evaporates, the stock market
collapses, the economy enters a recession, and the unemployment rate increases
dramatically.
The severe financial panic of 1907 stands out as an example of market failure due
to these two prominent frictions. The panic was triggered by a series of bad banking
decisions that led to a frenzy of withdrawals caused by asymmetric information and
public distrust in the liquidity of the banking system.6 Banks in many large cities,
including financial centers such as New York and Chicago, simply stopped sending
payments outside of their communities. The resulting disruption in the payment system
and to the flow of liquidity through the banking system led to a severe, though short-
lived, economic contraction. This experience led Congress to pass the Federal Reserve
Act in 1913.7 This act created the Federal Reserve System, composed of the Federal
Reserve Board in Washington, D.C., and 12 Federal Reserve Banks across the country.8
In 1913, the main monetary policy tool at the Fed's disposal was the discount
window. At that time, the Fed did not use open market operations-the buying and
6
The panic of 1907 started in October 1907 when three brothers-F. Augustus Heinze, Otto Heinze, and
Arthur P. Heinze-as well as Charles W. Morse attempted to manipulate the price of United Copper stock
by purchasing a large number of shares of the company. Their plan failed, and the stock price of United
Copper collapsed. The collapse led to depositor runs on banks and trust companies associated with the
Heinzes and Morse. This included a run on the Knickerbocker Trust Company, whose president was
connected to Morse. The Knickerbocker Trust Company failed, and the New York Stock Exchange fell
nearly 50 percent from its peak of the previous year in the wake of the failure. See Terrell (2021).
7
To aid its thinking on reforming the monetary system, Congress established the National Monetary
Commission. The landmark 24 volume report from the commission provides a rich review of the
operations of central banks in other countries, a history of financial crises in the U.S., and an appraisal of
the state of the contemporary banking system in the U.S. at the time.
8
See "History and Purpose of the Federal Reserve" on the St. Louis Fed's website at
https://www.stlouisfed.org/in-plain-english/history-and-purpose-of-the-fed.
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selling of government securities in the open market-to conduct monetary policy.
Instead, the Fed adjusted the money supply by lending directly to banks that needed
funds through the discount window. The Fed's ability to provide funds to banks as
needed made the money supply of the U.S. more elastic and considerably reduced the
seasonal volatility in interest rates.9 This ability also enabled the Fed to provide stability
in times of stress, helping banks that experienced rapid withdrawals to satisfy their
customers' demand for liquidity and thereby potentially preventing banking panics.
1920s: The Fed began to discourage strongly use of the discount window
In fact, many researchers have argued that the existence of the Fed's discount
window prevented a financial crisis in the early 1920s, when the banking sector came
under pressure as the U.S. economy transitioned to a peacetime economy following the
end of World War I.10 There had been an agricultural boom during the war and a
significant accumulation of debt within that sector. Farmers came under pressure as the
prices of agricultural goods dropped from wartime highs. The banks sought to support
their customers, and the Fed sought to support the banks. There were serious concerns
about the condition of several banks in parts of the country. The Fed's discount window
lending provided critical support that saved many banks but also resulted in habitual use
of the discount window by some banks during the 1920s.11
Slide 7 shows that as of August 1925, 593 member banks, 6 percent of the total,
had been borrowing for a year or more from Federal Reserve Banks. Moreover, there
were real solvency problems, and several banks failed with discount window loans
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outstanding. These challenges resulted in the Fed strongly discouraging banks from
continuous borrowing from the discount window and the adoption of a policy of
encouraging a "reluctance to borrow."12
By 1926, the Fed was explicit that borrowing at the discount window was meant
to be short term. As I emphasize in slide 8, the Federal Reserve's annual report for 1926
stated that while continuous borrowing by a member bank may be necessary, depending
on local economic conditions, "the funds of the Federal reserve banks are primarily
intended to be used in meeting the seasonal and temporary requirements of members, and
continuous borrowing by a member bank as a general practice would not be consistent
with the intent of the Federal reserve act."13
The late 1920s also highlighted Fed concerns about the purpose of the borrowing.
The Fed sought to distinguish between "speculative security loans" and loans for
"legitimate business."14 A staff reappraisal of the discount mechanism stated that "[t]he
controversy over direct pressure intensified in the latter part of the 1920s as an increasing
flow of bank credit went into the stock market."15 In short, the Fed observed that some
banks were becoming habitual borrowers from the discount window. It was concerned
12
See Shull (1971, pp. 33-34).
13
See Board of Governors (1927, p. 4). In 1926, approximately one-third of all banks in the U.S. were
member banks, holding about 60 percent of the total loans and investments for all banks; see Board of
Governors (1926). Banks receiving charters from the federal government were required to become
members of the Federal Reserve System while banks receiving charters from state governments had the
option to become members. Discount window borrowing was originally limited to Federal Reserve System
member banks. The Monetary Control Act of 1980 opened the window to all depository institutions.
14
See Gorton and Metrick (2013).
15
See Anderson (1971, p. 137). In the statement, "direct pressure" refers to the Fed policy of pressuring
banks not to borrow from the window. Congress may have shared some of those concerns, as the Federal
Reserve Act was amended in 1933 to include a passage in section 4 requiring Reserve Banks to be careful
about speculative uses of the Federal Reserve credit.
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that an overreliance on discount window borrowings would weaken banks and make
them more prone to failure.
In the late 1920s, the Fed switched to open market operations as its primary tool
for conducting monetary policy.16 That allowed the Fed to determine the aggregate
amount of liquidity in the system and to rely on private financial markets to distribute it
efficiently. The discount window would thus serve as a safety valve if there was a shock
that caused conditions to tighten unexpectedly or if individual banks experienced
idiosyncratic shocks or somehow lost access to interbank markets.
The intention of this set-up was for banks to use the discount window to borrow
from the Fed only occasionally. Ordinarily and predominantly, financial institutions
were supposed to rely on private markets for their funding. This set-up was designed to
limit moral hazard-the possibility that institutions take unnecessary risks when there is
no market discipline. This is the key balancing act. The Fed needs to be a reliable
backstop to prevent financial crises, but it also needs to minimize moral hazard that
comes from always standing ready to provide support.
1930s-1940s: The Great Depression and WWII
During the Great Depression in the 1930s, the banking system experienced severe
stress, including many bank runs. There are many reasons why the discount window was
insufficient to address the problems in the banking system in the 1930s. I will highlight
only two. First, many banks were insolvent rather than illiquid. Central bank lending is
not a fundamental solution in those circumstances. When banks are insolvent, it is
important to manage the closure in as orderly a manner as possible. The establishment of
the Federal Deposit Insurance Corporation (FDIC) in 1933 gave bank regulators
increased ability to do that. Relatedly, the challenging experiences of lending to troubled
banks in the 1920s likely made the Fed more reluctant to lend in circumstances in which
solvency concerns were material. Second, the types of collateral that the Fed was
initially able to accept when lending to banks were quite limited.
In response, in the early 1930s Congress expanded the range of banking assets
that could serve as collateral for discount window loans and added a variety of new Fed
emergency lending authorities.17 These new lending authorities were used in the 1930s
to help alleviate distress. Some were also used in the early 1940s as the Fed helped
support the World War II mobilization effort.
The period following the war was relatively calm. The role of the discount
window shifted from addressing distress in the banking system to acting as a safety valve
to manage tightness in money markets and support monetary policy operations.
1950-2000: Measures to discourage discount window borrowing
In March 1951, the U.S. Treasury and the Fed reached an agreement to separate
government debt management from the conduct of monetary policy, thereby laying the
foundation for the modern Fed.18
In the 1950s, the Fed set the interest rate on discount window loans above market
rates. Thus, it served as an effective ceiling on the federal funds rate. The Fed continued
to discourage extensive use of the discount window, but the relatively high interest rate
also made its sustained use less attractive.
In the 1960s, the Fed placed greater emphasis on open market operations to set its
monetary policy stance. Concurrently, the Fed shifted to a policy of setting the interest
rate on discount window loans below the market rates. Because the interest rate no
longer deterred use of the window, the Fed turned increasingly to other measures, such as
administrative pressures and moral suasion, to limit the frequency with which banks
requested loans from the discount window. Indeed, between the late 1920s and the
1980s, the Fed adopted and amended numerous restrictions on discount window
borrowing. Whenever discount window usage increased too much, the Fed tightened the
restrictions to suppress borrowing.
For example, in the 1950s, the Fed defined appropriate and inappropriate discount
window borrowing. In particular, the Board's regulations in 1955 stated that "[u]nder
ordinary conditions, the continuous use of Federal Reserve credit by a member bank over
a considerable period of time is not regarded as appropriate" and provided more details
on how Reserve Banks should evaluate the "purpose" of a credit request.19 By 1973, the
Board had made additional changes to its regulations on discount window use and
defined three distinct discount window programs: adjustment credit, intended to help
depository institutions meet short-term liquidity needs; seasonal credit, intended to help
small depository institutions manage liquidity needs that arise from seasonal swings in
loans and deposits; and extended credit, intended to help depository institutions that have
somewhat longer-term liquidity needs resulting from exceptional circumstances.20
Over time, the Board added provisions in its regulations requiring banks to
exhaust other sources of funding before using discount window credit.21 In addition, in
the early 1980s, the Fed levied a surcharge on frequent borrowings by large banks to
augment the administrative restrictions.22 Despite these policies to discourage use of the
discount window, slide 9 shows that discount window borrowing, adjusted for the size of
the Federal Reserve's balance sheet, was notable in the 1970s and 1980s, suggesting that
the discount window was an important marginal source of funding for banks during that
period.
That changed in the 1980s and early 1990s, when there were notable solvency
problems in the banking industry. During this period, the discount window provided
support to troubled institutions, while the FDIC sought to find merger partners or
otherwise manage the failure of these institutions in an orderly manner. The discount
window activity that took place while FDIC resolutions proceeded increased the
association between use of the discount window and being a troubled institution.23 As a
result, banks became more reluctant to borrow from the discount window. The greater
20
See Board of Governors of the Federal Reserve System, Extensions of Credit by Federal Reserve Banks,
38 Fed. Reg. 9065, 9076-9077 (April 10, 1973).
21
By 1980, the Board's regulations stated that adjustment credit "generally is available only after
reasonable alternative sources of funds, including credit from special industry lenders, such as Federal
Home Loan Banks, the National Credit Union Administration's Central Liquidity Facility, and corporate
central credit unions have been fully used"; seasonal credit was "available only if similar assistance is not
available from other special industry lenders"; and other extended credit was available only "where similar
assistance is not reasonably available from other sources, including special industry lenders"; see Board of
Governors of the Federal Reserve System, Extensions of Credit by Federal Reserve Banks, 45 Fed. Reg.
54009, 54009-54011 (Aug. 14, 1980). See also Clouse (1994).
22
See Meulendyke (1992).
23
A congressional inquiry found that this lending likely increased losses to the deposit insurance funds at
the time and led to limitations on the ability of the Federal Reserve to provide loans to troubled depository
institutions as part of the Federal Deposit Insurance Corporation Improvement Act of 1991.
reluctance to borrow from the discount window made it less effective, both as a monetary
policy tool and as a crisis-fighting tool. That resulted in a series of efforts by the Fed in
the early 2000s to change how the discount window operates. Tomorrow, I will discuss
those efforts when I speak at the Charlotte Economics Club.
A request for information
Before closing, I'd like to return to where I began. Understanding the history of
the discount window is important as we consider ways to ensure it continues to serve
effectively in its critical role in providing liquidity to the banking system as the economy
and financial system evolve. One way to ensure it continues to serve effectively is to
collect feedback from the public. Slide 10 provides some touch points on the Board's
request for information document. The request for information seeks feedback from the
public on a range of operational practices for the discount window and intraday credit,
including the collection of legal documents; the process for pledging and withdrawing
collateral; the process for requesting, receiving and repaying discount window advances;
the extension of intraday credit; and Reserve Bank communications practices. My
colleagues and I are looking forward to this feedback to inform potential future
enhancements to discount window operations. The period for responding to our request
for information ends on December 9, 2024.
Thank you to the event organizers and to the Davidson College community for the
opportunity to discuss this important topic with you. It has been such a pleasure to be
back on campus.
References
Anderson, Clay (1971). "Evolution of the Role and the Functioning of the Discount
Mechanism," in Reappraisal of the Federal Reserve Discount Mechanism, vol. 1.
Washington: Board of Governors of the Federal Reserve System, pp. 133-65,
https://fraser.stlouisfed.org/title/reappraisal-federal-reserve-discount-mechanism1206?browse=1970s#3578.
Board of Governors of the Federal Reserve System (1922). 8th Annual Report, 1921.
Washington: Government Printing Office,
https://fraser.stlouisfed.org/title/annual-report-board-governors-federal-reservesystem-117/1921-2479.
--- (1926). Federal Reserve Bulletin, vol. 12 (July),
https://fraser.stlouisfed.org/title/federal-reserve-bulletin-62/july-1926-20655.
--- (1927). 13th Annual Report, 1926. Washington: Government Printing Office,
https://fraser.stlouisfed.org/title/annual-report-board-governors-federal-reservesystem-117/1926-2484.
Carlson, Mark (forthcoming). The Young Fed: The Banking Crises of the 1920s and the
Making of a Lender of Last Resort. Chicago: University of Chicago Press.
Clouse, James (1994). "Recent Developments in Discount Window Policy," Federal
Reserve Bulletin, vol. 80 (November), pp. 965-77,
https://www.federalreserve.gov/monetarypolicy/1194lead.pdf.
Goodhart, Charles A.E. (1988). The Evolution of Central Banks. Cambridge, Mass.:
MIT Press.
Gorton, Gary (1988). "Banking Panics and Business Cycles," Oxford Economic
Papers, vol. 40 (December), pp. 751-81.
Gorton, Gary, and Andrew Metrick (2013). "The Federal Reserve and Financial
Regulation: The First Hundred Years," NBER Working Paper Series 19292.
Cambridge, Mass.: National Bureau of Economic Research, August,
https://www.nber.org/papers/w19292.
Meltzer, Allan (2003). A History of the Federal Reserve, Volume 1: 1913-1951.
Chicago: University of Chicago Press.
Miron, Jeffrey A. (1986). "Financial Panics, the Seasonality of the Nominal Interest
Rate, and the Founding of the Fed," American Economic Review, vol. 76 (March),
pp. 125-40.
Meulendyke, Ann-Marie (1992). "Reserve Requirements and the Discount Window in
Recent Decades," Federal Reserve Bank of New York, Quarterly Review, vol. 17
(Autumn), pp. 25-43,
https://www.newyorkfed.org/medialibrary/media/research/quarterly_review/1992
v17/v17n3article3.pdf.
Shull, Bernard (1971). "Report on Research Undertaken in Connection with a System
Study," in Reappraisal of the Federal Reserve Discount Mechanism, vol. 1.
Washington: Board of Governors of the Federal Reserve System, pp. 27-77,
https://fraser.stlouisfed.org/title/reappraisal-federal-reserve-discount-mechanism1206?browse=1970s.
Terrell, Ellen (2021). "United Copper, Wall Street, and the Panic of 1907," Library of
Congress, Inside Adams: Science, Technology & Business (blog), March 9,
https://blogs.loc.gov/inside_adams/2021/03/united-copper-panic-of-1907.
Willis, Henry Parker (1923). The Federal Reserve System: Legislation, Organization
and Operation. New York: The Ronald Press Company.
A History of the Fed's
Discount Window:
1913-2000
Philip N. Jefferson
Vice Chair, Federal Reserve Board
Davidson College, Oct. 8, 2024
Disclaimer: The views I will express today are my own and not necessarily those of the
Federal Open Market Committee (FOMC) or the Federal Reserve System.
Roadmap of Talk
• Economic Outlook
• Historical Perspective on Discount Window
• Request for Information



Figure 4. Newspaper Illustration from 1893
• Panic swirling
against banks
• Public confidence is
stopping the waves
• Banks have a
fortress mentality,
not lending, isolated
Table 1. Member Banks Borrowing Continuously for a
Year or More from Reserve Banks
As of Number
August 31, 1925 593
December 31, 1925 517
December 31, 1926 457
December 31, 1927 303
Source: Bernard Shull (1971), "Report on Research Undertaken in Connection with a System Study," in Reappraisal of the
Federal Reserve Discount Mechanism, vol. 1 (Washington: Board of Governors of the Federal Reserve System), table 1, p. 34.
In 1926 the Fed Encourages a Reluctance
to Borrow from Discount Window
funds of the Federal Reserve banks are primarily
"the
intended to be used in meeting the seasonal and
temporary requirements of members, and continuous
borrowing by a member bank as a general practice
would not be consistent with the intent of the Federal
Reserve Act."
1926 Federal Reserve Annual Report, page 4.

Request for Information (RFI)
• RFI published in the Federal Register on September 10, 2024
•
You can find the RFI at https://www.federalregister.gov
• Comment period is open until December 9, 2024