The Fed was tested on September 11, 2001, following the terrorist attacks against the United States. Many financial firms keep little cash on hand and expect to borrow on a daily basis to pay their ongoing bills and obligations. When the financial markets closed after September 11, many of these firms were in trouble. Unless some actions were taken quickly, they would default on their debts, leading to payment problems for other firms and further defaults. To prevent a default avalanche, the Federal Reserve immediately took a number of steps to provide additional funds to the financial system.
The first tool the Federal Reserve used was to allow banks to borrow more. Ordinarily the volume of these direct loans from the Federal Reserve is not very large. On Wednesday, September 12, total lending to banks rose to $45.5 billion, up from just $99 million the week before.
The Federal Reserve System also serves as a clearinghouse for checks. A bank will bring checks it receives from customers to the Federal Reserve and receive immediate credit on its accounts. The Federal Reserve then debits the account of the bank upon which the check was written. The difference between the credits and the debits extended by the Federal Reserve is called the Federal Reserve float. Immediately following September 11, the Federal Reserve allowed this float to increase sharply from $2.9 billion to $22.9 billion. These actions effectively put an additional $20 billion into the banking system.
The Federal Reserve also purchased government securities in the marketplace and as a result put $30 billion into the hands of private citizens and their banks. It arranged to provide dollars to foreign central banks such as the Bank of England so they could meet their needs and the needs of their banks to facilitate any dollar transactions they had during the crisis. Taken together, these actions increased the credit extended by the Federal Reserve by over $90 billion. This massive response prevented a financial panic that could have had devastating effects on the world economy.