The notion that money markets were essential for smooth working of the economy but exposed to liquidity shocks was a key lesson banking theorists and central bankers learnt from panics of the nineteenth century. This chapter deals with the historical experience of money market stabilization in Britain and the USA. Since the 1860s, the London market, based on specialized intermediaries (discount houses) trading mainly in banker acceptances and with regular access to the Bank of England as a lender of last resort, achieved an admired record of financial stability. In contrast, the New York market, operating essentially as an inter-bank reserve system with no central bank until 1913, was the epicenter of several disruptive crises during the National Banking era. In the interwar period, the attempt by US policy makers to transplant British institutions into the US financial system had only partial success in preventing new episodes of financial instability.
Intermediary Asset Pricing during the National Banking Era