Lender of Last Resort: The Concept in History
FRB Richmond Economic Review, Vol. 75, No. 2, March/April 1989, pp. 8-16
9 Pages Posted: 2 Nov 2012
Date Written: 1989
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.
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