When a Railroad Broke the Money Market

On June 21, 1970, the Penn Central Transportation Company filed for bankruptcy. It was the largest U.S. corporate failure to that point, and it had $87 million in commercial paper coming due that nobody would refinance. The market for short-term corporate IOUs — about $40 billion outstanding at the time — was used to treating big-name issuers as functionally risk-free. A railroad rated investment-grade three months earlier had just defaulted on paper Goldman Sachs had been placing with money-market investors weeks before the filing.

What happened next is the part that quietly rewired American finance. Holders of other companies' paper started refusing to roll, fearing they were holding the next Penn Central. Solvent borrowers like Chrysler suddenly could not refinance debt they had every intention of repaying. The Fed's response, organized over the weekend after the filing, was to phone the major banks and tell them the discount window would be open to anyone they lent to in support of a stranded commercial-paper issuer. It then suspended the Regulation Q ceiling on large CDs so banks could actually fund the lending.

That was the trick. The Fed never bought a single piece of commercial paper. It just made it costless for banks to substitute their own credit for the paper market's, and the panic stopped within weeks. Nonbank commercial paper outstanding fell roughly $3 billion that summer; bank loans absorbed almost all of it.

The template — the central bank as standing guarantor of money-market liquidity, even for instruments it doesn't directly hold — runs straight from that weekend through 2008's commercial paper funding facility and the 2023 BTFP. Penn Central was where the Fed stopped being a lender of last resort to banks and started being one for the system.