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

See all articles by Thomas M. Humphrey

Thomas M. Humphrey

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: 1989

Abstract

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

Humphrey, Thomas M., Lender of Last Resort: The Concept in History (1989). FRB Richmond Economic Review, Vol. 75, No. 2, March/April 1989, pp. 8-16. Available at SSRN: https://ssrn.com/abstract=2125371

Thomas M. Humphrey (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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