Bagehot for Beginners : The Making of Lender of Last Resort Operations in the Mid-Nineteenth Century

Vincent Bignon (1) , Marc Flandreau (2) , Stefano Ugolini (3)

1 DGEI-DEMFI-POMONE – Banque de France
2 Centre for Finance and Development
3 LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux

In this article we develop new tools to survey the development of lending-of-last-resort operations in the mid-nineteenth century. One finding 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 is that the extension of the Bank of England's lender-of-last-resort function went along with a reduction of its exposure to default risks, in contrast with accounts that have associated lending of last resort with moral hazard. Finally, we provide a new interpretation of the 'high rates' advocated by Bagehot. We suggest they were meant to prevent banks from free-riding on the safety offered by the central bank, and were aimed at forcing them to keep lending during crises so as to maintain a critical degree of liquidity in the money market.

Mots clés: Lending of last resort; Bagehot; Bank of England; Financial crises; History of monetary policy

Domaines: Economies et finances; Histoire

Vincent Bignon, Marc Flandreau, Stefano Ugolini. Bagehot for Beginners : The Making of Lender of Last Resort Operations in the Mid-Nineteenth Century. The Economic History Review, 2012, 65 (2), pp.580-608. ⟨10.1111/j.1468-0289.2011.00606.x⟩. ⟨halshs-00844045⟩