Only in the aftermath of that crisis did America establish a true lolr framework. But broken into regional fiefdoms, it was too timid in response to the Great Depression. The government responded by creating the Federal Reserve system in 1913.
There were eight American banking panics in the half-century between 18, each delivering heavy blows to the economy. The clearest evidence of the need for a financial backstop of some variety comes from the pre- lolr years. How to prevent panics without sowing new dangers is perhaps the central question faced by financial regulators. Banks will hold on to fewer liquid, low-yielding assets, piling instead into higher-risk lines of business. Foreknowledge of central-bank intervention may induce bad behaviour.
Nearly as old as Bagehot’s writing is the obvious objection to lolr: that of moral hazard.
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