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Frosted glass or raised eyebrow? Testing the Bank of England’s discount window policies during the crisis of 1847

Author

Listed:
  • Kilian Rieder

    () (University of Oxford)

  • Michael Anson

    (Bank of England)

  • David Bholat

    (Bank of England)

  • Miao Kang

    (Bank of England)

  • Ryland Thomas

    (Bank of England)

Abstract

"It is well-known that quantitative credit restrictions, rather than Bagehot-style “free lending” con- stituted the standard response to financial crises in the early days of central banking. But why did central banks in the past frequently restrict the supply of loans during financial crises? In this paper, we draw on a large novel, hand-collected loan-level data set to study the Bank of England’s policy response to the crisis of 1847. We find that credit rationing due to residual imperfect informa- tion `a la Stiglitz and Weiss (1981) alone cannot be a convincing explanation for quantitative credit restrictions during the crisis of 1847. We provide preliminary evidence which could suggest that discriminatory credit rationing on the basis of loan applicants’ type and identity characterized the BoE’s response to the crisis of 1847. Our results also show that “collateral” characteristics played an important role in the BoE’s loan decisions, even after one controls for the identity of loan applicants. This finding confirms the hypothesis in Capie (2002) and Flandreau and Ugolini (2011, 2013, 2014) that the characteristics of bills of exchange submitted to the discount window mattered. Since our results suggest that the Bank also took decisions on the basis of the identity of loan applicants, our preliminary findings would seem to challenge Capie’s “frosted glass” metaphor, but more work is required to confirm these conjectures."

Suggested Citation

  • Kilian Rieder & Michael Anson & David Bholat & Miao Kang & Ryland Thomas, 2018. "Frosted glass or raised eyebrow? Testing the Bank of England’s discount window policies during the crisis of 1847," Working Papers 18020, Economic History Society.
  • Handle: RePEc:ehs:wpaper:18020
    as

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    File URL: http://www.ehs.org.uk/dotAsset/dabf62df-ef2d-4cec-87f7-42e8e420e1c7.pdf
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    References listed on IDEAS

    as
    1. Stefano Ugolini, 2016. "Liquidity Management and Central Bank Strength: Bank of England Operations Reloaded, 1889-1910," Working Paper 2016/10, Norges Bank.
    2. Lutz G. Arnold & John G. Riley, 2009. "On the Possibility of Credit Rationing in the Stiglitz-Weiss Model," American Economic Review, American Economic Association, vol. 99(5), pages 2012-2021, December.
    3. Gary Richardson & William Troost, 2009. "Monetary Intervention Mitigated Banking Panics during the Great Depression: Quasi-Experimental Evidence from a Federal Reserve District Border, 1929-1933," Journal of Political Economy, University of Chicago Press, vol. 117(6), pages 1031-1073, December.
    4. Rudiger Dornbusch & Jacob A. Frenkel, 1984. "The Gold Standard and the Bank of England in the Crisis of 1847," NBER Chapters,in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 233-276 National Bureau of Economic Research, Inc.
    5. Charles W. Calomiris & Joseph R. Mason, 2003. "Consequences of Bank Distress During the Great Depression," American Economic Review, American Economic Association, vol. 93(3), pages 937-947, June.
    6. Mike Anson & David Bholat & 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).
    7. 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.
    8. Vincent Bignon & Marc Flandreau & Stefano Ugolini, 2012. "Bagehot for beginners: the making of lender‐of‐last‐resort operations in the mid‐nineteenth century," Economic History Review, Economic History Society, vol. 65(2), pages 580-608, May.
    9. 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," IHEID Working Papers 04-2011, Economics Section, The Graduate Institute of International Studies.
    10. Dornbusch, Rudiger & Frenkel, Jacob A., 1984. "The gold standard crisis of 1847," Journal of International Economics, Elsevier, vol. 16(1-2), pages 1-27, February.
    11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    12. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-855, September.
    13. repec:wly:jmoncb:v:49:y:2017:i:5:p:1059-1072 is not listed on IDEAS
    14. Santarosa, Veronica Aoki, 2015. "Financing Long-Distance Trade: The Joint Liability Rule and Bills of Exchange in Eighteenth-Century France," The Journal of Economic History, Cambridge University Press, vol. 75(03), pages 690-719, September.
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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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