1. Market crises, as the authors note, are a result of the confluence of several "perfect storm" factors--for example, a complex system with inadequate safety buffers is exacerbated by behavioral aberrations due to buoyant growth (today's "irrational exuberance") and (unwitting) adverse leadership. It is useful to think of financial crises in these terms rather than look for a simple "silver bullet" explanation.
2. Here is an example on the effect of adverse leadership in the 1907 episode. Teddy Roosevelt, who was then president under an anti-big business platform, had passed legislation to limit the amount railroads could charge passengers. The legislation brought into question the profitability of railroad companies, and their stock prices were battered in an already depressed market. Moreover, at a time when markets were already volatile, the legislation engendered only more uncertainty. Looking at some of the discussions policymakers are having today, there is real danger that we are still falling into the same traps. As Milton Friedman was wont to say, we should not judge policy proposals by their intentions, but by their effects.
3. Before the Fed, the national banking system did not have an efficient mechanism for increasing the supply of money, and rates would remain stubbornly high because counries had to hoard gold to prevent potentially crippling money supply outflows. Thus, in times when liquidity dried up, one option was for the Treasury to redeem bonds earlier than their maturity and/or make lump-sum interest payments, but this was done on an ad hoc basis. In response to the 1907 crisis, clearing houses instead issued temporary, emergency loans to member banks in the form of "clearing house certificates"--this was called an "artificial" increase in the money supply, because the certificates did not add to the supply of money directly, but instead freed up cash on bank balance sheets. Obviously, these certificates were only good insofar as they were deemed acceptable by counterparties--somehow, with the backing of J.P. Morgan (person, not bank), this was achieved.
For today's Fed critics and skeptics, I think it is a useful but challenging execrise to think about what our monetary system would look like without a central bank. Would we revert (at least partially) to a gold standard? Would private groups perform central banking functions, as happened in 1907? How would this affect the business cycle we know today?
Finally, a cartoon contemporary to the period, which is titled "The Cental Bank-why should Uncle Sam establish one, when Uncle [Morgan] is already on it?"
