Birth of the Federal Reserve: Crisis in the womb$

The outbreak of World War I shut the New York Stock Exchange for more than 4 months. The conventional explanation maintains that the closure prevented a collapse in stock prices that threatened a repetition of the Panic of 1907. This paper shows that the Wilson Administration encouraged the suspension of trading to pave the way for launching the Federal Reserve System, which was in the process of being born. Federal Reserve insiders considered an adequate stock of gold crucial to the success of the new monetary system. Closing the Exchange helped to forestall an outflow of gold. Central bankers can learn how crisis control is supposed to work from the 1914 experience. r 2006 Elsevier B.V. All rights reserved.