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Lender of last resort: the concept in history


  • Thomas M. Humphrey


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.

Suggested Citation

  • Thomas M. Humphrey, 1989. "Lender of last resort: the concept in history," Economic Review, Federal Reserve Bank of Richmond, issue Mar, pages 8-16.
  • Handle: RePEc:fip:fedrer:y:1989:i:mar:p:8-16:n:v.75no.2

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    References listed on IDEAS

    1. Robert L. Hetzel, 1982. "The October 1979 regime of monetary control and the behavior of the money supply in 1980," Economic Review, Federal Reserve Bank of Richmond, issue Jul, pages 3-15.
    2. Poole, William, 1982. "Federal Reserve Operating Procedures: A Survey and Evaluation of the Historical Record since October 1979," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 575-596, November.
    3. Goodfriend, Marvin, 1983. "Discount window borrowing, monetary policy, and the post-October 6, 1979 federal reserve operating procedure," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 343-356, September.
    4. Stephen H. Axilrod, 1985. "U.S. monetary policy in recent years: an overview," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 14-24.
    5. Marvin Goodfriend & Gary S. Anderson & Anil K. Kashyap & George R. Moore & Richard D. Porter, 1984. "A weekly perfect foresight model of the nonborrowed reserve operating procedure," Working Paper 84-04, Federal Reserve Bank of Richmond.
    6. David L. Mengle, 1986. "The discount window," Economic Review, Federal Reserve Bank of Richmond, issue May, pages 2-10.
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    Cited by:

    1. Steelman, Aaron & Weinberg, John A., 2015. "The Financial Crisis: Toward an Explanation and Policy Response," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 5-21.
    2. Xavier Freixas, 2009. "Monetary policy in a systemic crisis," Oxford Review of Economic Policy, Oxford University Press, vol. 25(4), pages 630-653, Winter.
    3. repec:fip:fedreq:00051 is not listed on IDEAS
    4. Smeets Heinz-Dieter & Schmid Anita, 2014. "Europäische Staatsschuldenkrise, Lender of last resort und Bankenunion / European sovereign debt crisis, lender of last resort and banking union," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 65(1), pages 47-74, January.
    5. 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, vol. 9(1), pages 1-27, March.
    6. George G. Kaufman, 1998. "Central banks, asset bubbles, and financial stability," Working Paper Series WP-98-12, Federal Reserve Bank of Chicago.
    7. Smith, R. Todd & van Egteren, Henry, 2005. "Interest rate smoothing and financial stability," Review of Financial Economics, Elsevier, vol. 14(2), pages 147-171.
    8. 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.
    9. Xavier Freixas & Bruno Maria Parigi, 2008. "Lender of Last Resort and Bank Closure Policy," CESifo Working Paper Series 2286, CESifo Group Munich.
    10. Marc Dobler & Simon T Gray & Diarmuid Murphy & Bozena Radzewicz-Bak, 2016. "The Lender of Last Resort Function after the Global Financial Crisis," IMF Working Papers 16/10, International Monetary Fund.
    11. 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, vol. 39(2), pages 119-126, April.
    12. Esther Jeffers, 2009. "Action du prêteur en dernier ressort : qu’avons-nous appris lors de cette crise ?," Revue d'Économie Financière, Programme National Persée, vol. 94(1), pages 241-249.
    13. Goodhart, Charles A.E. & Huang, Haizhou, 2005. "The lender of last resort," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1059-1082, May.
    14. Vitor Gaspar, 2014. "The Making of a Continental Financial System; Lessons for Europe from Early American History," IMF Working Papers 14/183, International Monetary Fund.
    15. 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.
    16. Jeffers, Esther, 2010. "The lender of last resort concept: from Bagehot to the crisis of 2007," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 8.
    17. 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.
    18. Aaron Steelman & John A. Weinberg, 2008. "The financial crisis : toward an explanation and policy response. 2008 annual report of the Federal Reserve Bank of Richmond," Annual Report, Federal Reserve Bank of Richmond, pages 4-19.


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