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May/June 1994, 
Vol. 76, No. 3
Posted 1994-05-01

Is the Discount Window Necessary? A Penn-Central Perspective

by Charles W. Calomiris

Policymakers generally regard the discount window as an essential tool for preventing the spread of financial crises, but some critics have argued that it is an unnecessary—and costly—policy instrument. The arguments against the discount window emphasize that it may unwisely postpone bank failures or undermine the Fed’s control over the supply of reserves. Furthermore, the critics argue, open market operations are a sufficient tool for policy objectives. Charles W. Calomiris argues that the discount window, properly administered, can help the government direct temporary credit subsidies through the banking system to firms suffering from a “panic” in a nonbank financial market. He looks at the commercial paper crisis of mid-1970, which revolved around the failure of Penn Central, a watershed event in the history of the commercial paper market. Penn Central, Calomiris contends, is an example of a beneficial discount window intervention. He concludes that the discount window in the future could have a potentially stabilizing effect on nonbank financial markets, including new, untested markets for credit and derivative instruments.