Frosted glass or raised eyebrow? Testing the Bank of England’s discount window policies during the crisis of 1847

"It is well-known that quantitative credit restrictions, rather than Bagehot-style “free lending” con- stituted the standard response to financial crises in the early days of central banking. But why did central banks in the past frequently restrict the supply of loans during financial crises? In this paper, we draw on a large novel, hand-collected loan-level data set to study the Bank of England’s policy response to the crisis of 1847. We find that credit rationing due to residual imperfect informa- tion `a la Stiglitz and Weiss (1981) alone cannot be a convincing explanation for quantitative credit restrictions during the crisis of 1847. We provide preliminary evidence which could suggest that discriminatory credit rationing on the basis of loan applicants’ type and identity characterized the BoE’s response to the crisis of 1847. Our results also show that “collateral” characteristics played an important role in the BoE’s loan decisions, even after one controls for the identity of loan applicants. This finding confirms the hypothesis in Capie (2002) and Flandreau and Ugolini (2011, 2013, 2014) that the characteristics of bills of exchange submitted to the discount window mattered. Since our results suggest that the Bank also took decisions on the basis of the identity of loan applicants, our preliminary findings would seem to challenge Capie’s “frosted glass” metaphor, but more work is required to confirm these conjectures."