Thus, injections of liquidity have the potential to directly address the causes of financial instability and therefore to counteract the pernicious effects of financial instability on broad macroeconomic conditions. With this understanding, we can now turn to some history.
The panic of 1907 and the creation of the Federal Reserve During the National Banking Era, which began in 1865 and ended in 1914, when the Federal Reserve began operations, reserves were channeled to New York banks, which became providers of liquidity to the financial system through the New York Clearinghouse.