Bank liquidity risk from John Law (1705) to Walter Bagehot (1873)

Jérôme de Boyer Des Roches
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Jérôme de Boyer Des Roches: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: By granting credit and issuing money, banks take a liquidity risk that is to say the risk of being unable to reimburse its notes in coins. Four different explanations of a bank liquidity crisis have been provided by different authors, since John Law and up to Walter Bagehot. First, according to Law (1703) and Steuart (1767), the distinction between money of account (the pound sterling) and money of payment (the guinea) may induce a bank run. Second, according to Cantillon (1730), Hume (1752), Ricardo (1810-1823) and the Currency School (1836-1844), the bank reserve becomes insufficient as a consequence of over issues. Third, according to Smith (1776) and the Banking School (1844-1848), discounting of fictitious bills, by decreasing the shareholders' funds, leads to banking illiquidity. Lastly, according to Thornton (1802) and Bagehot (1873), the liquidity crisis is a consequence of panics: a "flight" to money for Thornton, a "flight" to credit for Bagehot. The analysis of these four different explanations gives a new light on classical monetary controversies.

Keywords: Real bills doctrine; Coined money; Bank credit risk; Bank exchange risk; Money of account; Shareholders’ funds; Bank liquidity risk; Run; Money market; Currency market (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

Published in European Journal of the History of Economic Thought, 2013, 20 (3), ⟨10.1080/09672567.2011.653878⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01497487

DOI: 10.1080/09672567.2011.653878

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