Walter Bagehot and the Lender of Last Resort

Walter Bagehot was a renowned British journalist, businessman, and essayist who wrote extensively on government, economics, and banking. His work "Lombard Street: A Description of the Money Market" published in 1873, is considered a cornerstone of central banking literature.

The Lender of Last Resort Function

One of the key functions of a central bank is to act as the 'lender of last resort'. This means that during times of financial crisis, when commercial banks face a shortage of liquidity and cannot borrow from anywhere else, the central bank steps in to provide them with funds. This function is crucial because it helps prevent bank runs and the collapse of the financial system.

Walter Bagehot's Emphasis on the Role

In his influential book, "Lombard Street," Walter Bagehot strongly emphasized the importance of the Bank of England (and by extension, other central banks) fulfilling the role of the lender of last resort. He argued that during a panic, the central bank should lend freely, but at a high interest rate, against good collateral. This approach would provide necessary liquidity to solvent, but illiquid, institutions, while discouraging reckless borrowing.

Walter Bagehot specifically stressed this crucial function of the central bank in his work published in 1873.

Significance of the Year 1873

The year 1873 is significant because it marks the publication of Walter Bagehot's seminal work, "Lombard Street." In this book, he systematically laid out the principles for how a central bank, particularly the Bank of England, should manage financial crises, with the lender of last resort function being a central theme. His ideas greatly influenced modern central banking practices worldwide.

Therefore, the importance of the central bank's function as the lender of the last resort was stressed by Walter Bagehot in 1873.