Financial crises and the payments system: lessons from the National Banking Era

Since the Great Depression, the Fed has historically intervened during potential financial crises to ensure that financial market participants were provided with the liquidity necessary to complete their transactions. In recent years, this part of the Fed's role in the payments system has come under increased scrutiny as advances in computer and communications technology have led to increases in the liquidity of many types of financial claims and to the creation of new financial markets and new forms of payment. Recent years have also seen passage of legislation designed to more precisely limit the scope and administration of the Fed's safety net as it applies to individual banks. ; This article examines the current debate over the Fed's payments safety net role in light of the historical experience of the National Banking Era (1864-1914). Though somewhat remote from modern experience, this period is highly relevant for the study of financial crises and payment system disruptions, offering a number of lessons for the effective provision of liquidity during crises. The most evident and least controversial lesson from the National Banking Era experience is that in crisis situations, timing is critical.