Norges Bank

Bicentenary project, Working Paper

Bagehot for beginners: The making of lending of last resort operations in the mid-19th century

Vincent Bignon, Marc Flandreau and Stefano Ugolini
Working Paper


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.


Norges Bank’s Working Papers present research projects and reports that are generally not in their final form. Other analyses by Norges Bank’s economists are also included in the series. The views and conclusions in these documents are those of the authors.

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ISSN 1502-8143 (online)

Published 6 November 2009 10:58
Published 6 November 2009 10:58