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Lender of last resort: the concept in history

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  • Thomas M. Humphrey
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    Abstract

    Henry Thornton (1760-1815) and Walter Bagehot (1826-1877) laid down a set of rules for stopping banking panics and crises. Known collectively as the classical theory of the lender of last resort, those rule stressed (1) protecting the aggregate money stock, not individual institutions, (2) letting insolvent institutions fail, (3) accommodating sound but temporarily illiquid institutions only, (4) charging penalty rates, (5) requiring good collateral, and (6) preannouncing these conditions in advance of crises so as to remove uncertainty. These precepts continue to inform central bank policy today.

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    File URL: http://www.richmondfed.org/publications/research/economic_review/1989/pdf/er750202.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Richmond in its journal Economic Review.

    Volume (Year): (1989)
    Issue (Month): Mar ()
    Pages: 8-16

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    Handle: RePEc:fip:fedrer:y:1989:i:mar:p:8-16:n:v.75no.2

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    Keywords: Lenders of last resort ; Banks and banking; Central ; Banks and banking - History;

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    Cited by:
    1. Goodhart, Charles A.E. & Huang, Haizhou, 2005. "The lender of last resort," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1059-1082, May.
    2. Arie Arnon, 2007. "The Early Round Of The Bullionist Debate 1800-1802: Boyd, Baring And Thornton’S Innovative Ideas," Working Papers 0714, Ben-Gurion University of the Negev, Department of Economics.
    3. Rötheli, Tobias F., 2010. "Causes of the financial crisis: Risk misperception, policy mistakes, and banks' bounded rationality," The Journal of Socio-Economics, Elsevier, vol. 39(2), pages 119-126, April.
    4. Xavier Freixas, 2009. "Monetary policy in a systemic crisis," Oxford Review of Economic Policy, Oxford University Press, vol. 25(4), pages 630-653, Winter.
    5. George G. Kaufman, 1998. "Central banks, asset bubbles, and financial stability," Working Paper Series WP-98-12, Federal Reserve Bank of Chicago.
    6. Smith, R. Todd & van Egteren, Henry, 2005. "Interest rate smoothing and financial stability," Review of Financial Economics, Elsevier, vol. 14(2), pages 147-171.
    7. Walker F. Todd & James B. Thomson, 1990. "An insider's view of the political economy of the too big to fail doctrine," Working Paper 9017, Federal Reserve Bank of Cleveland.
    8. Xavier Freixas & Bruno Maria Parigi, 2008. "Lender of Last Resort and Bank Closure Policy," CESifo Working Paper Series 2286, CESifo Group Munich.

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