Bank liquidity risk, from John Law (1705) to Walter Bagehot (1873)
de Boyer des Roches, Jérôme (2009), Bank liquidity risk, from John Law (1705) to Walter Bagehot (1873), 2009 Annual Conference of the History of Economics Society, 2009-06, Denver, États-Unis
TypeCommunication / Conférence
Conference title2009 Annual Conference of the History of Economics Society
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Author(s)de Boyer des Roches, Jérôme
Abstract (EN)By granting credit and issuing money, banks take a liquidity risk that is to say the risk of being unable to reimburse its notes in coins. Four different explanations of a bank liquidity crisis have been provided by different authors, since John Law and up to Walter Bagehot. First, according to Law (1703) and Steuart (1767), the distinction between money of account (the pound sterling) and money of payment (the guinea) may induce a bank run. Second, according to Cantillon (1730), Hume (1752), Ricardo (1810-1823) and the Currency School (1836-1844), the bank reserve becomes insufficient as a consequence of over issues. Third, according to Smith (1776) and the Banking School (1844-1848), discounting of fictitious bills, by decreasing the shareholders’ funds, leads to banking illiquidity. Lastly, according to Thornton (1802) and Bagehot (1873), the liquidity crisis is a consequence of panics: a “flight” to money for Thornton, a “flight” to credit for Bagehot. The analysis of these four different explanations gives a new light on classical monetary controversies.
Subjects / Keywordscurrency market; money market; run; bank liquidity risk; bank exchange risk; bank credit risk; shareholders’ funds; Money of account; coined money; real bills doctrine
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