This book is the outgrowth of a conference held at the Federal Reserve Bank of Cleveland in December 2012, on the eve of the Fed's centennial year. Along with commemorating the centennial, the conference honored Michael Bordo's contributions to monetary economics and economic history. Because Bordo's contributions are so many and so varied, the papers included in this volume cover a wide range of topics including (but not limited to) the Great Depression, the gold standard, monetary non-neutrality, Canadian exceptionalism, exchange rate policy, and financial crises. After a few introductory reflections, I will focus my review on two topics: the role of the central bank as a lender of last resort (LOLR) during a financial crisis and the evolving independence of the Fed.

Although located at the end of the volume, the paper by Hugh Rockoff and Eugene White should be read first as it masterfully surveys Bordo's extensive and remarkable contributions. This chapter is a tour de force and not only puts the present volume into proper context, but also surveys a significant portion of twentieth century monetary history. Rockoff and White conclude: “History provides useful lessons, but you need a grandmaster of monetary history to draw the right lessons” (p. 352).

Bordo the grandmaster concludes the volume with a list of three main responsibilities of a central bank. First, the central bank needs to maintain price stability. Second, the central bank should function as a LOLR when there are liquidity shocks, but should preferably use open market operations to provide this liquidity. If the discount window is used the loans should only be to solvent institutions. Third, the central bank should protect the payments system and provide liquidity assistance only to institutions that provide liquidity. The importance of price stability is now well accepted in the profession. The historical record provides ample evidence that modern market economies are ill-equipped to handle sudden and unexpected movements in the price level without substantial effects on real activity. But the central bank's role as LOLR (and protector of the payments system) is more controversial as the devil is in the details. For example, important details include: (1) in the midst of a systemic liquidity shock and the fire sale of assets, how can the central bank distinguish an insolvent bank from a solvent bank? (2) exactly which institutions are liquidity providers (and thus worthy of protection) in the twenty-first century financial system? and (3) are open market operations sufficient for liquidity provision during a crisis or is direct lending necessary?

In an important contribution to central bank history, Mark Carlson and David Wheelock provide a fascinating account of the evolution of LOLR behavior by the Fed. The apparent failure of the LOLR function in the Great Depression is partly attributed to the Fed's limited ability to lend only to member banks and with only limited forms of acceptable collateral. Further, liquidity policy was conducted at the district level, and sometimes at cross purposes, for example, the Chicago Fed's unwillingness to lend to the New York Fed. The 1932 addition of Section 13(3) to the Federal Reserve Act was a legislative attempt to remedy these concerns and granted the Fed enormous power to act as a LOLR during a crisis. The Bernanke Fed repeatedly relied on these provisions in explaining the legislative rationale for the alphabet-soup list of lending facilities during the 2007–2008 financial crisis. Carlson and Wheelock conclude that open market operations are an insufficient response to systemic liquidity shocks: “[T]he essence of Bagehot's Rule requires the conversion of illiquid assets into liquid assets, not one form of liquid assets (Treasury securities) into another (Fed liabilities)” (pp. 93–94). “Open market operations, which are conducted with a relatively small set of institutions, are unlikely to alleviate a crisis unless interbank markets are functioning reasonably smoothly, which has not been the case in many crises” (pp. 89–90). In sum, it is hard to imagine how open market operations alone would have been a sufficient response to the 2007–2008 systemic liquidity shock.

In a contribution to our understanding of the National Bank Era, Jon Moen and Ellis Tallman provide bank-level evidence of the limited ability of the New York Clearinghouse system to provide sufficient liquidity during a financial crisis. Relatedly, Kris Mitchenter and Gary Richardson provide new evidence of interbank contagion during the Great Depression. This chapter, along with the earlier paper by Richardson and William Troost (“Monetary Intervention Mitigated Banking Panics during the Great Depression: Quasi-Experimental Evidence from the Federal Reserve District Border in Mississippi, 1929–1933.” Journal of Political Economy 117, no. 6 [2009]: 1031–73) demonstrates both contagion effects and the helpful effects of aggressive LOLR functions. Taken together, these two chapters suggest there is a need for a central bank to provide liquidity during systemic liquidity shocks.

In his spirited contribution to the volume, Allan Meltzer argues that by using its sweeping lending power during the recent crisis, the Fed has lost much of its independence and has become under closer scrutiny by the Congress. Meltzer is also concerned with what he sees as a shift of power to the Board of Governors (and away from District Banks). Similarly, Marvin Goodfriend is sharply critical of what he calls “credit policy” in which the Fed deviates from its typical rule of only purchasing short-term Treasuries and essentially conducts fiscal policy. In their chapter on central bank independence, Forrest Capie and Geoffrey Wood provide a more nuanced view of the ebb and flow of central bank independence. The patron saint of Fed independence, William McChesney Martin, had in fact an ambiguous view of independence: “the [Fed] should be independent within the government not independent of government” (p. 143). Meltzer argues that a rules-based Fed could restore its lost independence. But Capie and Wood are more skeptical: “So long as we have had central banks governments use them at times of crisis, and have not hesitated to override whatever sets of rules supposedly constrained the central bank” (p. 148).

The so-called “Great Moderation” lulled the profession into thinking that home-grown financial crises are a thing of the past. The present volume is a helpful reminder of the lessons history provides in responding to these events. In his contribution to the volume, Barry Eichengreen suggests that these historical analogies are particularly important when decision-making time is short and information is limited. Along with the title of this volume, this suggests that economic history is more than a record of the past, but a tool or lens for conducting policy in the future.