Open and Operating: Providing Liquidity to Avoid a Crisis

1. What is a banking crisis? What were the main causes of the crises that occurred during the national banking period and what were the main events of a typical crisis?

2. What is an “elastic currency?” How was an elastic currency to be achieved under the National Banking Act? Why didn’t this work in practice?

3. What harmful economic effects occurred when banks suspended cash payments?

4. What evidence is there that the Federal Reserve Act achieved greater success than the National Banking Act in creating an elastic currency?

5. What steps did the Fed take following September 11 to avoid a financial crisis? What do you think might have happened if the Fed had been unable or unwilling to take these actions?

Source: “Open and Operating: Providing Liquidity to Avoid a Crisis.” Bruce Champ, Federal Reserve Bank of Cleveland Economic Commentary, February 15, 2003, pp. 1-3.