Document Type



New York University Journal of Law & Business




“Lending of last resort” is one of the key powers of central banks. As a lender of last resort, the Federal Reserve (the “Fed”) famously supports commercial banks facing distressed liquidity conditions, thereby mitigating destabilizing bank runs. Less famously, lender-of-last-resort powers also influence the distribution of credit among different groups in society and therefore have high stakes for economic inequality. The Fed’s role as a lender of last resort witnessed an unprecedented expansion during the 2007–2009 Crisis when the Fed invoked emergency powers to lend to a new set of borrowers known as “shadow banks”. The decision proved controversial and spurred legislative reform narrowing the Fed’s authority as well as an ongoing scholarly debate. Participants in this debate, the Article argues, limited their focus to financial stability considerations, thereby neglecting those powers’ considerable distributive implications.

This Article contributes to the current literature by demonstrating the distributive stakes of lender-of-last-resort powers through a concrete historical example: the legislative debate around the 1913 Federal Reserve Act that established the Fed. During that time, three different groups debated the legal definition of “eligible collateral” that the Fed could accept from borrowers to secure emergency loans. The first group was corporate financiers, who were interested in supporting capital markets. The second group was the Democratic framers of the Act, who tried to divert credit away from corporate securities and into small businesses. The third group was farmers that needed credit for developing the agrarian periphery. I argue that each of these groups tried to shape the definition of eligible collateral in ways that would promote that group’s unique credit needs and reduce its borrowing costs. For us today, this history is an invitation to reconsider the distributive implications of the current lender-of-last-resort powers and revise them accordingly.