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Bagehot for beginners: the making of lender‐of‐last‐resort operations in the mid‐nineteenth century

  • VINCENT BIGNON
  • MARC FLANDREAU
  • STEFANO UGOLINI

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.

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File URL: http://hdl.handle.net/10.1111/j.1468-0289.2011.00606.x
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Article provided by Economic History Society in its journal The Economic History Review.

Volume (Year): 65 (2012)
Issue (Month): 2 (05)
Pages: 580-608

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Handle: RePEc:bla:ehsrev:v:65:y:2012:i:2:p:580-608
DOI: j.1468-0289.2011.00606.x
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