In the 1930s, the US Congress did more than its fair share in helping to turn a financial crisis into a global depression. Yesterday it looked as though it was auditioning to assume that role again.

Back then, Congress’s vote for protectionist legislation, the infamous Smoot-Hawley Tariff Act, which erected trade walls around America, almost brought to a halt the free movement of goods and services vital to the efficient functioning of the global economy.

Yesterday, in rejecting a plan to help to rescue the US financial system that had been constructed and reconstructed by the Bush Administration in collaboration with the Democratic and Republican leaderships, the House of Representatives dealt a hammer-blow to an already almost immobilised global financial system.

In the immediate aftermath of the vote, Washington and Wall Street were plunged into chaos. The initial House vote to reject the so-called Paulson plan was by 226 votes to 206, though the Democratic leadership scrambled to try to pull more opponents of the vote across to pass it. But as time appeared to be running out, financial markets went into a state of shock, with the Dow Jones Industrial Average plunging to 778 points. The broader S&P index recorded its largest one-day percentage fall since the crash of 1987.

Times Archive, 1932: US banking reforms to restore confidence

The American Government realized long ago that if a way could be found to stop bank failures, or at any rate to reduce their number, the end of hoarding would be in sight, and possibly the end of the business depression

• New banking laws: Mr Hoover's hopes

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Even worse hit were the credit markets. For weeks now, banks have been so concerned about the creditworthiness of their counterparties that they have been unwilling to lend for anything other than very short periods. That has sent interest rates on loans to companies and other private sector institutions skyrocketing, and that trend intensified last night.

The fear stalking the markets is that Congress might in effect have been saying that there was no more money coming to the aid of beleaguered banks and that they would have to deal with the consequences.

Late in the day in Washington, as they digested both the shock of the vote and the repercussions in markets, officials from the Administration and Congress were again at work trying to find a way to make the Bill more palatable to its opponents. The problem was that opposition came from both sides of the political divide. A sizeable number of Democrats opposed the plan because they objected to what they saw as a bailout of the comfortable and well-upholstered banks of Wall Street; a larger number of Republicans were against because they opposed substantial government support for just about anybody.

The implications for the global economy could be profound. Administration officials have argued (sotto voce, for obvious reasons) that if there is no bailout, more financial institutions are at risk of collapse.

Yesterday the global crisis had already entered a new phase, as governments moved to take control of vast swaths of the financial system. In Britain, Bradford & Bingley joined Northern Rock as a ward of the Government. In Europe, the banking operations of the insurance company Fortis were taken over by the Dutch and Belgian governments. Iceland moved to nationalise the bulk of Glitnir, one of the country’s largest banks. If the US financial system, the focus of most of the underlying problems in the economy, cannot get rid of the trillion dollars or more of bad assets on its books, the chances are that there will be much more intervention by the Federal Reserve, the Bank of England and European authorities.

The biggest danger is that the higher interest rates now shooting through markets will squeeze consumers and companies harder everywhere.

Yesterday the Federal Reserve injected a new round of financing into the system to try to free up the immobilised markets, lending unprecedented sums of money to US and European banks to help them through the crisis.

There have been worrying signs in the United States that the financial crisis is starting to unsettle bank customers. Sketchy data suggests that people are moving deposits out of banks that are considered more at risk than others. This has not yet turned into a full-scale bank run, but any more uncertainty could change that.

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