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Where it all began: lending of last resort and the Bank of England during the Overend-Gurney panic of 1866

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  • Marc Flandreau

    (Graduate Institute of International and Development Studies, Geneva)

  • Stefano Ugolini

    (Scuola Normale Superiore, Pisa)

Abstract

The National Monetary Commission was deeply concerned with importing best practice. One important focus was the connection between the money market and international trade. It was said that Britain’s lead in the market for “acceptances” originating in international trade was the basis of its sterling predominance. In this article, we use a so-far unexplored source to document the portfolio of bills that was brought up to the Bank of England for discount and study the behavior of the Bank of England during the crisis of 1866 (the so-called Overend-Gurney panic) when the Bank began adopting lending of last resort policies (Bignon, Flandreau and Ugolini 2011). We compare 1865 (a “normal” year) to 1866. Important findings include: (a) the statistical predominance of foreign bills in the material brought to the Bank of England; (b) the correlation between the geography of bills and British trade patterns; (c) a marked contrast between normal times lending and crisis lending in that main financial intermediaries and the “shadow banking system” only showed up at the Bank’s window during crises; (d) the importance of money market investors (bills brokers) as chief conduit of liquidity provision in crisis; (e) the importance of Bank of England’s supervisory policies in ensuring lending-of-last-resort operations without enhancing moral hazard. An implication of our findings is that Bank of England’s ability to control moral hazard for financial intermediaries involved in acceptances was another reason for the rise of sterling as an international currency.

Suggested Citation

  • Marc Flandreau & Stefano Ugolini, 2011. "Where it all began: lending of last resort and the Bank of England during the Overend-Gurney panic of 1866," Working Paper 2011/03, Norges Bank.
  • Handle: RePEc:bno:worpap:2011_03
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    References listed on IDEAS

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    1. Flandreau, Marc & Jobst, Clemens, 2005. "The Ties that Divide: A Network Analysis of the International Monetary System, 1890 1910," The Journal of Economic History, Cambridge University Press, vol. 65(04), pages 977-1007, December.
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    5. Bagehot,Walter, 2011. "Lombard Street," Cambridge Books, Cambridge University Press, number 9781108035811, May.
    6. Gary B. Gorton, 2010. "Questions and Answers about the Financial Crisis," NBER Working Papers 15787, National Bureau of Economic Research, Inc.
    7. Flandreau, Marc & Jobst, Clemens, 2005. "The Ties that Divide. A Network Analysis of the International Monetary System," CEPR Discussion Papers 5129, C.E.P.R. Discussion Papers.
    8. Charles Goodhart, 1988. "The Evolution of Central Banks," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262570734, January.
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    Cited by:

    1. Gary B. Gorton, 2012. "Some Reflections on the Recent Financial Crisis," NBER Working Papers 18397, National Bureau of Economic Research, Inc.
    2. Gary Gorton, 2015. "Stress for Success: A Review of Timothy Geithner's Financial Crisis Memoir," Journal of Economic Literature, American Economic Association, vol. 53(4), pages 975-995, December.
    3. David-Jan Jansen & Robert Mosch & Carin Cruijsen, 2015. "When Does the General Public Lose Trust in Banks?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(2), pages 127-141, October.
    4. Stefano Ugolini, 2011. "Foreign exchange reserve management in the 19th century: The National Bank of Belgium in the 1850s," Working Paper 2011/07, Norges Bank.
    5. Marc Flandreau & Stefano Ugolini, 2014. "The Crisis of 1866," Post-Print hal-01293925, HAL.
    6. Hautcoeur, Pierre-Cyrille & Riva, Angelo & White, Eugene N., 2014. "Floating a “lifeboat”: The Banque de France and the crisis of 1889," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 104-119.
    7. Prados de la Escosura, Leandro, 2013. "Human development in Africa: A long-run perspective," Explorations in Economic History, Elsevier, vol. 50(2), pages 179-204.
    8. Gary Gorton & Guillermo Ordoñez, 2016. "Fighting Crises," NBER Working Papers 22787, National Bureau of Economic Research, Inc.
    9. Stephen Quinn & William Roberds, 2015. "Responding to a Shadow Banking Crisis: The Lessons of 1763," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1149-1176, September.
    10. Rodríguez Braun, Carlos, 2014. "La banca y las crisis financieras en la literatura popular: Una fortuna peligrosa, de Ken Follett /Banking and Financial Crises in Popular Literature: A Dangerous Fortune, by Ken Follett," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 32, pages 201-222, Enero.
    11. Anson, Mike & Bhola, David & Kang, Miao & Thomas, Ryland, 2017. "The Bank of England as lender of last resort: New historical evidence from daily transactional data," eabh Papers 17-03, The European Association for Banking and Financial History (EABH).
    12. Bartels, Bernhard & Eichengreen, Barry & Weder, Beatrice, 2016. "No Smoking Gun: Private Shareholders, Governance Rules and Central Bank Financial Behavior," CEPR Discussion Papers 11625, C.E.P.R. Discussion Papers.
    13. Calomiris, Charles W. & Flandreau, Marc & Laeven, Luc, 2016. "Political foundations of the lender of last resort: A global historical narrative," Journal of Financial Intermediation, Elsevier, vol. 28(C), pages 48-65.
    14. Klovland, Jan Tore & Øksendal, Lars Fredrik, 2013. "The decentralised central bank: regional bank rate autonomy in Norway, 1850-1892," Discussion Paper Series in Economics 6/2013, Norwegian School of Economics, Department of Economics.
    15. Mike Anson & David Bholat Author-Name-First: David & Miao Kang & Ryland Thomas, 2017. "The Bank of England as Lender of Last Resort: New historical evidence from daily transactional data," Working Papers 0117, European Historical Economics Society (EHES).
    16. Gary B. Gorton & Guillermo L. Ordoñez, 2014. "How Central Banks End Crises," PIER Working Paper Archive 14-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    17. Giovanni Federico, 2011. "A Tale of Two Oceans: Market Integration Over the High Seas, 1800-1940," Working Papers 0011, European Historical Economics Society (EHES).
    18. Marc Flandreau & Gabriel Geisler Mesevage, 2014. "The Separation of Information and Lending and the Rise of Rating Agencies in the United States," IHEID Working Papers 11-2014, Economics Section, The Graduate Institute of International Studies.
    19. Galo Nuño & Pedro Tedde & Alessio Moro, 2011. "Money dynamics with multiple banks of issue: evidence from Spain 1856-1874," Working Papers 1119, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

    Financial crises; lending of last resort; history of monetary policy; shadow banking system; banking supervision.;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913

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