DP8362 Where It All Began: Lending of Last Resort and the Bank of England during the Overend, Gurney Panic of 1866

Author(s): Marc Flandreau, Stefano Ugolini
Publication Date: April 2011
Keyword(s): Bagehot, Central Banking, Lending of Last Resort, Shadow Banking System
JEL(s): G01, G15, N13
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8362

In this article, we use the original ledgers of the Bank of England to document which institutions received liquidity during the crisis of 1866. The so-called Overend-Gurney panic is when the Bank began adopting lending of last resort policies (Bignon, Flandreau and Ugolini 2011). We compare 1865 (a 'normal'? year) to 1866. Important findings include: (a) the statistical predominance of foreign bills in the material brought to the Bank of England; (b) the correlation between the geography of bills and British trade patterns; (c) a marked contrast between normal times lending and crisis lending in that main financial intermediaries and the 'shadow banking system'? only showed up at the Bank's window during crises; (d) the importance of money market investors (bills brokers) as chief conduit of liquidity provision in crisis; (e) the importance of Bank of England's supervisory policies in ensuring lending-of-last-resort operations without enhancing moral hazard. These features call for important and interesting parallels with recent policies adopted by the Federal Reserve to deal with the sub-prime crisis.