Bagehot for Beginners: The Making of Lending of Last Resort Operations in the Mid-19th Century

Norges Bank’s Working Papers Series No. 2009-22

40 Pages Posted: 4 Dec 2009

See all articles by Vincent Bignon

Vincent Bignon

Banque de France

Marc Flandreau

Centre for Economic Policy Research (CEPR)

Stefano Ugolini

University of Toulouse 1 - Laboratoire d'Etudes et de Recherches sur l'Économie, les Politiques et les Systèmes Sociaux (LEREPS)

Date Written: December 2, 2009

Abstract

In this paper we survey the development of lending of last resort operations in the mid-19th century. We identify and document critical dimensions of the extension of lending of last resort functions, and also develop original empirical tests enabling us to identify such things as the emergence of “free lending” during financial crisis. Our focus is predominantly on the Bank of England, but we also survey some counterpart evidence for the Bank of France. Our main finding, which extends earlier work (Collins 1992), 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 finding is that the extension of the Bank of England’s LLR function went along with a reduction of its exposure to default risks, in contrast to accounts that have associated Lending of Last Resort with risk taking or feared, as some contemporaries did, that systematic LLR operations would encourage moral hazard. Finally, we provide a new interpretations of the “high rates” advocated by Bagehot. We suggest that they were meant to prevent banks from free riding on the security offered by the central bank, forcing them to march forward to prevent a market retreat and maintain a critical degree of liquidity.

Keywords: Lending of last resort, Bagehot, Bank of England, financial crises, history of monetary policy

JEL Classification: E58, G01, N13

Suggested Citation

Bignon, Vincent and Flandreau, Marc and Ugolini, Stefano, Bagehot for Beginners: The Making of Lending of Last Resort Operations in the Mid-19th Century (December 2, 2009). Norges Bank’s Working Papers Series No. 2009-22, Available at SSRN: https://ssrn.com/abstract=1517392 or http://dx.doi.org/10.2139/ssrn.1517392

Vincent Bignon (Contact Author)

Banque de France ( email )

DGEI 49-1430
31 rue Croix des Petits Champs
Paris, 75001
France
+33142924330 (Phone)

Marc Flandreau

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Stefano Ugolini

University of Toulouse 1 - Laboratoire d'Etudes et de Recherches sur l'Économie, les Politiques et les Systèmes Sociaux (LEREPS) ( email )

21, Allée de Brienne
Toulouse, 31042
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
227
Abstract Views
1,912
Rank
254,917
PlumX Metrics