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

Author

Listed:
  • Jérôme de Boyer Des Roches

    (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract

By granting credit and issuing money, banks take a liquidity risk that is to say the risk of being unable to reimburse its notes in coins. Four 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), 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), Ricardo (1810-1823) and the Currency School (1836-1844), the bank reserve becomes insufficient as a consequence of over issues. Third, according to Smith (1776) and the Banking School (1844-1848), discounting of fictitious bills, by decreasing the shareholders' funds, leads to banking illiquidity. Lastly, according to Thornton (1802) and Bagehot (1873), the liquidity crisis is a consequence of panics: a "flight" to money for Thornton, a "flight" to credit for Bagehot. The analysis of these four different explanations gives a 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)," Post-Print hal-01497487, HAL.
    • Handle: RePEc:hal:journl:hal-01497487
    DOI: 10.1080/09672567.2011.653878
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    Cited by:

    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. Antonio Bianco & Claudio Sardoni, 2018. "Banking theories and macroeconomics," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 41(2), pages 165-184, April.
    5. 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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