Document Type

Case Study

Case Series

Broad-Based Emergency Liquidity

JEL Codes

G01, G28


As geopolitical tensions in Europe began to devolve into World War I, international investors began selling stocks and securities on the New York Stock Exchange (NYSE), converting the proceeds into gold. A massive outflow of gold from the United States would have likely sparked a banking panic. To avert this, the Treasury secretary pushed for the closure of the NYSE and authorized banks to issue emergency currency at the start of August 1914 under powers granted by the Aldrich-Vreeland Act of 1908. This move allowed national banks to issue additional bank notes against privately issued assets such as commercial paper, warehouse receipts, and securities in general. This emergency currency could be used to satisfy depositor withdrawal requests, although it could not be counted as legal reserves. Participating banks issued about $386 million in emergency currency, less than one-quarter of the maximum available to them. Contemporary evaluations praised the issuance of emergency currency as a necessity that calmed money markets and showed the utility of a government-backed response to financial crises. However, early leaders of the Federal Reserve System claimed that the real end of the panic came from the eventual opening of the Federal Reserve later in 1914.

Date Revised