Bagehot for Beginners: The Making of Lender of Last Resort Operations in the Mid-Nineteenth Century

Vincent Bignon, Marc Flandreau () and Stefano Ugolini
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Marc Flandreau: Centre for Finance and Development - GRADUATE INSTITUTE OF INTERNATIONAL AND DEVELOPMENT STUDIES

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Abstract: In this article we develop new tools to survey the development of lending-of-last-resort operations in the mid-nineteenth century. One finding is that free lending and extensive liquidity support against good collateral developed gradually after 1847, and was already a fact of life before Bagehot published Lombard Street. Another is that the extension of the Bank of England's lender-of-last-resort function went along with a reduction of its exposure to default risks, in contrast with accounts that have associated lending of last resort with moral hazard. Finally, we provide a new interpretation of the 'high rates' advocated by Bagehot. We suggest they were meant to prevent banks from free-riding on the safety offered by the central bank, and were aimed at forcing them to keep lending during crises so as to maintain a critical degree of liquidity in the money market.

Keywords: Lending of last resort; Bagehot; Bank of England; Financial crises; History of monetary policy (search for similar items in EconPapers)
Date: 2012
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00844045v1
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Published in The Economic History Review, 2012, 65 (2), pp.580-608. ⟨10.1111/j.1468-0289.2011.00606.x⟩

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Related works:
Journal Article: Bagehot for beginners: the making of lender‐of‐last‐resort operations in the mid‐nineteenth century (2012)
Working Paper: Bagehot for beginners: The making of lending of last resort operations in the mid-19th century (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00844045

DOI: 10.1111/j.1468-0289.2011.00606.x

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