Open and Operating: Providing Liquidity to Avoid a Crisis

Overview: The white paper asserts that the terrorist attacks of 9/11 triggered a staggering increase in demand for U.S. dollars all over the world, a demand which threatened to disrupt the American payments system but was met swiftly and successfully by the Federal Reserve. Earlier in the nation’s history, the system didn’t respond so well to severe shocks. Further it says that Communications and computer systems were destroyed or heavily impaired. Sites important to the payments operations of numerous banks had to be evacuated. This paper asserts further that when people think of how the Federal Reserve helps to keep the economy and the financial system working well, keeping inflation under wraps is likely to spring to mind before “providing liquidity.” But the specter of the post-attack economic havoc that 9/11 could have caused—but didn’t—can teach us how important the provision of liquidity can be in a time of crisis. The initial impact of the terrorist attacks on the financial system is reminiscent of the beginnings of crises during the late 1800s and early 1900s. On September 11 and the following days, the system encountered a significant shock to the demand for liquidity. The disruptions in communications and transportation associated with the attacks conjure September 19. This strong reaction by the Federal Reserve is deeply rooted in the nation’s history.

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Format: PDF | Size: 142KB | Date: Feb 2003 | Pages: 4