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

Author

Listed:
  • Vincent Bignon

    (DGEI-DEMFI-POMONE – Banque de France)

  • Marc Flandreau

    (Centre for Finance and Development - GRADUATE INSTITUTE OF INTERNATIONAL AND DEVELOPMENT STUDIES)

  • Stefano Ugolini

    (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - UT2J - Université Toulouse - Jean Jaurès - UT - Université de Toulouse - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)

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.

Suggested Citation

  • Vincent Bignon & Marc Flandreau & Stefano Ugolini, 2012. "Bagehot for Beginners : The Making of Lender of Last Resort Operations in the Mid-Nineteenth Century," Post-Print halshs-00844045, HAL.
    • Handle: RePEc:hal:journl:halshs-00844045
    DOI: 10.1111/j.1468-0289.2011.00606.x
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00844045
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    More about this item

    Keywords

    Lending of last resort; Bagehot; Bank of England; Financial crises; History of monetary policy;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913

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