In describing the performance of the Federal Reserve during the Great Depression, former Federal Reserve Chairman Ben Bernanke has written: “The Fed proved far too passive during the Depression. It was ineffective in its role of lender of last resort, failing to stop the runs that forced thousands of small banks to close.”
a. What does Bernanke mean by the Fed’s role as a lender of last resort?
b. How might the Fed have stopped the bank runs during the early 1930s?
c. Why didn’t the Fed take the actions you describe in your answer to part (b)?