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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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    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, Elsevier, vol. 29(5), pages 1059-1082, May.
    2. Eric Maskin & Chenggang Xu, 2001. "Soft budget constraint theories: From centralization to the market," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 9(1), pages 1-27, March.
    3. Xavier Freixas, 2009. "Monetary policy in a systemic crisis," Economics Working Papers 1200, Department of Economics and Business, Universitat Pompeu Fabra.
    4. George G. Kaufman, 1998. "Central banks, asset bubbles, and financial stability," Working Paper Series, Federal Reserve Bank of Chicago WP-98-12, Federal Reserve Bank of Chicago.
    5. Smith, R. Todd & van Egteren, Henry, 2005. "Interest rate smoothing and financial stability," Review of Financial Economics, Elsevier, Elsevier, vol. 14(2), pages 147-171.
    6. Xavier Freixas & Bruno Maria Parigi, 2008. "Lender of Last Resort and Bank Closure Policy," CESifo Working Paper Series 2286, CESifo Group Munich.
    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. Rötheli, Tobias F., 2010. "Causes of the financial crisis: Risk misperception, policy mistakes, and banks' bounded rationality," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 39(2), pages 119-126, April.
    9. Esther Jeffers, 2009. "Action du prêteur en dernier ressort : qu’avons-nous appris lors de cette crise ?," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 94(1), pages 241-249.
    10. Michael D. Bordo, 1998. "The financial crisis of 1825 and the restructuring of the British financial system - commentary," Review, Federal Reserve Bank of St. Louis, issue May, pages 77-82.
    11. Arie Arnon, 2007. "The Early Round Of The Bullionist Debate 1800-1802: Boyd, Baring And Thornton’S Innovative Ideas," Working Papers, Ben-Gurion University of the Negev, Department of Economics 0714, Ben-Gurion University of the Negev, Department of Economics.

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