Stability Pass-Through: Lessons From the Richmond Fed’s LOLR Support During the 1920–1921 Recession

The banking crisis in 2023 has highlighted the Federal Reserve’s importance as a lender of last resort (LOLR) to stabilize the banking system. The level and speed of deposit outflows at Silicon Valley Bank (SVB) were unprecedented and contributed to liquidity and funding problems. In an environment where liquidity stress manifests quickly, the discount window is an important tool that helps banks manage liquidity risk. However, SVB was not prepared to use the discount window to meet its deposit outflows.

As a post-crisis reform, bank regulators are introducing new rules to improve banks’ ability to access the discount window as a part of prudent contingency liquidity planning. In this post, we examine how the provision of the liquidity by the Federal Reserve to its member banks affected the stability of the banks that relied on their member correspondents during the recession of 1920–1921. We study the behavior of Virginia state banks. The Richmond Fed’s district includes the Commonwealth of Virginia where its headquarters resides. The Richmond Fed provided liquidity to its member banks to prevent a crisis. Our research shows that the presence of a strong lender of last resort was important to preserving financial stability.

Provision of Liquidity by the Richmond Fed and Its Impact on Virginia State Banks

When prices soared after World War I, central banks responded by quickly raising interest rates, leading to the brief but severe recession of 1920–1921. Banks in agricultural and rural areas faced a large economic shock from the commodity price collapse following the WWI boom (Tallman and White, 2019; White and Roberds, 2020; Carlson, 2023). Before the Banking Act of 1935, Reserve Banks could implement their own monetary policies, in particular through discount-window lending.

The more industrial and urbanized Federal Reserve districts followed the lead set by the Federal Reserve Board and the Federal Reserve Bank of New York and reduced their lending to member banks to tame inflation and set interest rates consistent with the gold standard. But the Reserve Banks in agricultural and rural districts dissented from the Board’s contractionary policy and offered the liquidity needed to offset conditions that might have ignited a banking panic. The Richmond Fed was one of eight districts that expanded credit to their member banks in the early stage of the 1920–1921 recession to prevent widespread bank runs within their districts (Tallman and White, 2019).

Southern states served by the Federal Reserve Bank of Richmond faced a large shock because of a 70-percent drop in cotton prices that followed a wartime commodities boom. Many loans were collateralized by cotton or assets tied to cotton production. The banks would have been forced to sell loans at depressed prices and would have failed if they faced liquidity problems.

Moreover, most banks in the Richmond Fed districts were nonmember banks. The Federal Reserve Act then made it compulsory for national banks to become members, whereas state banks could choose. Without access to the discount window, these state nonmember banks borrowed from national member correspondents. Figure 1 shows the funding network between the First National Bank in Richmond and its respondent banks and between all lending correspondents in Richmond and their respondents in 1920. Member banks that provided short-term funding to nonmembers maintained an extensive network across banks in Virginia. This extensive interbank borrowing network connected the fate of the entire banking system. All banks, even those institutions not directly lending to cotton producers and the cotton industry, were therefore endangered by the collapse of the price of cotton.

Figure 1. Funding Networks between Richmond Correspondents and Their Respondents

Panel A: First National Bank in Richmond

Panel B: All Lending Banks in Richmond

Source: Virginia State Bank Examination Reports (1920).

To prevent a panic, the Richmond Fed offered liquidity to its member banks (Tallman and White, 2019). The provision of liquidity enabled the banks to roll over the loans and prevent fire sales of cotton-related assets at depressed prices. The decision to offer liquidity to member banks was crucial for the stability of nonmember banks as well, because many nonmember banks depended on member banks to indirectly access the discount-window liquidity.

Figure 2 shows the amount of borrowing by national (member) and state (generally nonmember) banks in Virginia. Both national and nonmember banks borrowed extensively. The amount of borrowing by national banks declined from 1919 to 1920 but increased from 1920 to 1921. The amount of borrowing by state banks also increased until 1920 and stayed level until 1921.

Figure 2. Borrowing by National and State Banks in Virginia, 1917–1923

Source: Annual Report of the Comptroller of the Currency (1917–1923) and Virginia State Bank Call Reports (1917–1923).

Stability of State Banks in Virginia

Previous studies have shown that the policy actions taken by the agricultural and rural reserve districts were effective (Tallman and White, 2019; White and Roberds, 2020; Rieder, 2022). The recession of 1920–1921 was no less severe than other recessions during the National Banking Era or the Great Depression. Although major banking panics occurred during these recessions, the 1920–1921 recession did not produce a banking crisis. In addition, bank credit in the districts that eased credit policy did not contract as severely as in the districts that did not do so at the recession’s end.

The Richmond Fed’s LOLR support enabled members to pass through discount window liquidity to nonmembers that had large deposit outflows, preventing a panic. To confirm that the Richmond Fed’s liquidity provision successfully stabilized the banking sector and contributed to the economic recovery, we show the movement of deposits and loans during and after the 1920–1921 recession.

Figure 3 plots deposits and loans held by state banks from 1918 to 1928. Panel A shows that deposits declined sharply as the recession deepened between 1920 and 1921, but they recovered rapidly when the recession ended. Deposits returned to the 1920 level by 1922 and grew rapidly afterward. Panel B, which plots the movement of loans, shows similar patterns. Loans declined during the recession but grew over the rest of the 1920s. The movement of deposits and loans shows that the banking sector expanded rapidly following the 1920–1921 recession.

Figure 3. Deposits at and Loans by State Banks in Virginia, 1918–1928

Panel A: Deposits

Panel B: Loans

Source: Virginia State Bank Call Reports (1918–1928).


Our study shows that the Richmond Fed’s LOLR support in 1920–1921 helped banks manage bank runs and prevent a panic. The Richmond Fed successfully supported the banking system that saw large deposit withdrawals during the period when there was no deposit insurance. Since the failure of SVB in March 2023, many policymakers and regulators no longer treat uninsured deposits as “sticky” liabilities at any bank. Policymakers are attempting to improve the Federal Reserve’s LOLR function due to the speed and size of bank runs in the digital age. Our study presents evidence that effective LOLR support enhances banks’ ability to manage run risk.

Guest Contributors

Selman Erol is an assistant professor of economics at Carnegie Mellon University’s Tepper School of Business.

Guillermo L. Ordoñez is a professor of economics and finance at the University of Pennsylvania and a research associate at the National Bureau of Economic Research (NBER).


Carlson, M. (2023). “Learning to Be a Lender of Last Resort: A History of the Federal Reserve’s Approach to Emergency Liquidity Provision in the 1920s,” Working Paper.

Office of the Comptroller of the Currency (1917-1923), Annual Report, Washington, DC: U.S. Government Printing Office.

Rieder, Kilian (2022). “Financial Stability Policies and Bank Lending: Quasi-experimental Evidence from Federal Reserve Interventions in 1920-21,” European Systemic Risk Board Working Paper 113.

Roberds, W., & White, E. (2020). “Central Banks, Global Shocks, and Local Crises: Lessons from the Atlanta Fed’s Response to the 1920-1921 Recession,” Federal Reserve Bank of Atlanta Policy Hub No. 15-2020.

Tallman, E., & White, E. N. (2019). “Monetary Policy When One Size Does Not Fit All: the Federal Reserve Banks and the Recession of 1920–1921,” Working Paper.

Virginia State Banking Division (1920-1922): State Bank Examination Report, State Corporation Commission.

Virginia State Banking Division (1920-192): Annual Report Showing the Condition of the Incorporated State Banks Operating in Virginia, State Corporation Commission.

White, E. (2017). Protecting Financial Stability in the Aftermath of World War I: The Federal Reserve Bank of Atlanta’s Dissenting Policy. In P. Rousseau & P. Wachtel (Eds.), Financial Systems and Economic Growth: Credit, Crises, and Regulation from the 19th Century to the Present (Studies in Macroeconomic History, pp. 201-231). Cambridge: Cambridge University Press.