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Bank liquidity risk: From John Law (1705) to Walter Bagehot (1873)

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  • Jérôme de Boyer des Roches

Abstract

By granting credit and issuing money, banks take a liquidity risk - that is, the risk of being unable to reimburse its notes in coins. Five different explanations of a bank liquidity crisis have been provided by different authors, since John Law and up to Walter Bagehot. First, according to Law (1703) and Steuart ([1767] [1998]), the distinction between money of account (the pound sterling) and money of payment (the guinea) may induce a bank run. Second, according to Cantillon (1730), Hume ([1752] 1972), Ricardo (1810-1823) and the Currency School (1837-1858), the bank reserve becomes insufficient as a consequence of a diminishing value of money allied with over issues. Third, according to Thornton ([1802] 1939, 1991) and the Banking School (1840-1857), it can occur as a consequence of a falling exchange rate that is not linked with over issues. Fourth, according to Smith (1776) and the Banking School, discounting of fictitious bills, by decreasing the shareholders' funds, leads to bank illiquidity. Lastly, according to Thornton ([1802] 1939, 1991) and Bagehot (1873), the liquidity crisis is a consequence of bank panics: a "flight" to money for Thornton, a "flight" to credit for Bagehot. The analysis of these five different explanations sheds new light on classical monetary controversies.

Suggested Citation

  • Jérôme de Boyer des Roches, 2013. "Bank liquidity risk: From John Law (1705) to Walter Bagehot (1873)," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 20(4), pages 547-571, August.
    • Handle: RePEc:taf:eujhet:v:20:y:2013:i:4:p:547-571
    DOI: 10.1080/09672567.2011.653878
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    1. Arnon,Arie, 2011. "Monetary Theory and Policy from Hume and Smith to Wicksell," Cambridge Books, Cambridge University Press, number 9780521191135.
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    1. repec:dau:papers:123456789/10195 is not listed on IDEAS
    2. Rebeca Gomez Betancourt & Jérôme de Boyer des Roches, 2013. "Origins and developments of Irving Fisher's compensated dollar plan," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 20(2), pages 261-283, April.
    3. repec:dau:papers:123456789/10190 is not listed on IDEAS
    4. Curott, Nicholas, 2016. "Adam Smith’s Theory of Money and Banking," Studies in Applied Economics 47, The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.

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