Historic Domestic Use of Exchange Stabilization Fund

The government introduced another series of steps this morning to bring order to markets, the most unusual of which being the provision of FDIC-type insurance for money market funds using the Treasury Department's Exchange Stability Fund as a backstop.

In support of Treasury, the Federal Reserve also announced more liquidity measures to ensure stability in the money markets.

According to Michael Bordo, an economist at Rutgers University who has researched the fund's history, today's move will be the first time in its 74-year history that the ESF will be used for domestic purposes.

"The Treasury can do whatever it likes with the fund," says Bordo. "They do not need to get permission from Congress."

The ESF was created in 1934 as part of the Gold Reserve Act. The money from the proceeds after the devaluation of the dollar following the Act was put into the stabilization fund. During World War II, the ESF was used to finance some of America's allies. The last time the ESF was used was in the 1990's to bailout Mexico.

The issue with the ESF has always been that Congress does not have oversight over it, so the government's action is sure to raise a stink.

"It's a very clever move but it's going to lead to some question being asked," says Bordo