Abstract
For all that the debate over the principle of separation (or not) of monetary stability and financial stability policies gained in importance prior to the Great Recession, it remained “silent” on the policy of the central bank as the lender of last resort. The classical theory of central banking inaugurated by Henry Thornton and developed by the members of the banking school—Thomas Tooke, John Stuart Mill, and John Fullarton—openly addressed the function of lending in last resort. Tooke even proposed that monetary stability and financial stability policies should be coordinated by means of the interest rate so as to strengthen the action of the lender of last resort. The present article examines the theoretical arguments of the classical theory of central banking regarding the coordination of monetary stability policy, which aims at maintaining convertibility into gold specie, with lender-of-last-resort policy, which ultimately ensures financial stability. As a result, it is inferred that the classical theory of central banking contributed to a distinctive development of the theory of lending of last resort and retrospectively challenged Walter Bagehot's doctrine.
classical theory of money, central banking, monetary stability, financial stabilization, lending of last resort
The text of this article is only available as a PDF.
References
Arnon, Arie.
1991
. Thomas Tooke: Pioneer of Monetary Theory
. Ann Arbor
: University of Michigan Press
.Arnon, Arie.
2011
. Monetary Theory and Policy from Hume and Smith to Wicksell: Money, Credit, and the Economy
. Cambridge
: Cambridge University Press
.Bagehot, Walter.
1873
. Lombard Street: A Description of the Money Market
. London
: Henry S. King
.Baring, Alexander [Lord Ashburton].
1847
. The Financial and Commercial Crisis Considered
. London
: John Murray
.Bernanke, Ben.
2008
. “Liquidity Provision by the Federal Reserve
.” Speech at the Federal Reserve Bank of Atlanta Financial Markets Conference
, Sea Island, Ga.
, May 13
.Bernanke, Ben.
2012
. “The Effects of the Great Recession on Central Bank Doctrine and Practice
.” B. E. Journal of Macroeconomics
12
, no. 3
: 1
–10
.Bernanke, Ben.
2013
. The Federal Reserve and the Financial Crisis
. Princeton, N.J.
: Princeton University Press
.Bernanke, Ben, and Mark Gertler.
1999
. “Monetary Policy and Asset Price Volatility
.” Federal Reserve Bank of Kansas City Economic Review
84
, no. 1
: 17
–51
.Bernanke, Ben, and Mark Gertler.
2001
. “Should Central Banks Respond to Movements in Asset Prices?
” American Economic Review
91
, no. 2
: 253
–57
.Blanchard, Olivier.
2000
. “Bubbles, Liquidity Traps, and Monetary Policy
.” In Japan's Financial Crisis and Its Parallels to U.S. Experience
, edited by R. Mikitani and A. S. Posen, 185
–93
. Institute for International Economics
, Special Report 13, September
.Bordo, Michael D.
1990
. “The Lender of Last Resort: Alternative Views and Historical Experience
.” Federal Reserve Bank of Richmond Economic Review
76
, no. 1
: 18
–29
.Borio, Claudio.
2014
. “Central Banking Post-Crisis: What Compass for Unchartered Waters?
” In Central Banking at a Crossroads
, edited by C. Goodhart, D. Gabor, J. Vestergaard, and I. Ertük, 191
–216
. London
: Anthem Press
.Borio, Claudio, and William R. White.
2003
. “Whither Monetary and Financial Stability? The Implications of Evolving Policy Regimes
.” In Monetary Policy and Uncertainty: Adapting to a Changing Economy
, 131
–211
. Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyo
.Carré, Emmanuel, and Laurent Le Maux.
2024
. “Lombard Street Revisited? Bagehot's Rule and Bernanke's Interpretation
.” European Journal of the History of Economic Thought
31
, no. 5
: 781
–97
.Castiglionesi, Fabio, and Wolf Wagner.
2012
. “Turning Bagehot on His Head: Lending at Penalty Rates When Banks Can Become Insolvent
.” Journal of Money, Credit, and Banking
44
, no. 1
: 201
–19
.Cecchetti, Stephen G., Hans Genberg, and Sushil Wadhwani.
2002
. “Asset Prices in a Flexible Inflation Targeting Framework
.” NBER Working Paper 8970. National Bureau of Economic Research
, June
.Clapham, John.
1944
. The Bank of England: A History, 1694–1914
. 2
vols. Cambridge
: Cambridge University Press
.Diatkine, Sylvie.
2003
. “Théorie bancaire, théorie monétaire et prêt ultime chez Thornton
.” Cahier d’économie politique
45
: 41
–60
.Diatkine, Sylvie.
2013
. “Monetary Policy on Interest Rates: A Retrospective Analysis Since Thornton
.” European Journal of the History of Economic Thought
20
, no. 5
: 715
–40
.Edgeworth, Francis Y.
1888
. “The Mathematical Theory of Banking
.” Journal of the Royal Statistical Society
51
, no. 1
: 113
–27
.Feavearyear, Albert.
1931
. The Pound Sterling: A History of English Money
. Oxford
: Clarendon Press
.Fetter, Frank W.
1965
. The Development of British Monetary Orthodoxy, 1797–1875
. Cambridge, Mass.
: Harvard University Press
.Glasner, David.
1985
. “A Reinterpretation of the Classical Monetary Theory
.” Southern Economic Journal
52
, no. 1
: 46
–67
.Glasner, David.
1989
. “On Some Classical Monetary Controversies
.” History of Political Economy
21
, no. 2
: 201
–29
.Glasner, David.
1992
. “The Real-Bills Doctrine in the Light of the Law of Reflux
.” History of Political Economy
24
, no. 4
: 867
–94
.Glasner, David.
2000
. “Classical Monetary Theory and the Quantity Theory
.” History of Political Economy
32
, no. 1
: 39
–59
.Gourio, François, Anil K. Kashyap, and Jae W. Sim.
2018
. “The Tradeoffs in Leaning Against the Wind
.” IMF Economic Review
66
, no. 1
: 70
–115
.Greenspan, Alan.
2002
. “Opening Remarks
.” In Rethinking Stabilization Policy
, 1
–10
. Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyo
.Hetzel, Robert L.
1987
. “Henry Thornton: Seminal Monetary Theorist and Father of the Modern Central Bank
.” Federal Reserve Bank of Richmond Economic Review
73
, no. 4
: 3
–16
.Hilton, Boyd.
1977
. Corn, Cash, Commerce: The Economic Policies of the Tory Governments, 1815–1830
. Oxford
: Oxford University Press
.Hogan, Thomas L., Linh Le, and Alexander William Salter.
2015
. “Ben Bernanke and Bagehot's Rule
.” Journal of Money, Credit, and Banking
47
, nos. 2–3
: 333
–48
.Humphrey, Thomas M.
1975
. “The Classical Concept of the Lender of Last Resort
.” Federal Reserve Bank of Richmond Economic Review
61
, no. 1
: 2
–9
.Humphrey, Thomas M., and Robert E. Keleher.
1984
. “The Lender of Last Resort: A Historical Perspective
.” Cato Journal
4
, no. 1
: 275
–318
.James, John A.
2012
. “Panics, Payments Disruptions, and the Bank of England before 1826
.” Financial History Review
19
, no. 3
: 289
–309
.Laidler, David.
1972
. “Thomas Tooke on Monetary Reform
.” In Essays in Honour of Lord Robbins
, edited by M. Peston and B. Corry, 168
–85
. White Plains, N.Y.
: International Arts and Sciences Press
.Laidler, David.
1988
. “British Monetary Orthodoxy in the 1870s
.” Oxford Economic Papers
40
, no. 1
: 74
–109
.Laidler, David.
2000
. “Highlights of the Bullionist Controversy
.” Report 2000-2. University of Western Ontario, Department of Economics
.Laidler, David.
2003
. “Two Views on the Lender of Last Resort: Thornton and Bagehot
.” Cahier d’économie politique
45
: 61
–78
.Le Maux, Laurent.
2012
. “The Banking School and the Law of Reflux in General
.” History of Political Economy
44
, no. 4
: 595
–618
.Le Maux, Laurent.
2014
. “Richard Cantillon and David Hume on Money and Banking: The Foundations of Two Theoretical Traditions
.” Journal of Economic Surveys
28
, no. 5
: 956
–70
.Le Maux, Laurent.
2018
. “Banque centrale et finance: La Banque d'Angleterre, le taux d'intérêt et le Bank Act de 1844
.” Revue économique
69
, no. 4
: 541
–73
.Le Maux, Laurent.
2020
. “The Classical Monetary Theory on Bank Liquidity and Finance
.” Oxford Economic Papers
72
, no. 3
: 692
–709
.Le Maux, Laurent.
2021
. “Bagehot for Central Bankers
.” Working Paper 147. Institute for New Economic Thinking
, New York
, February
.Macleod, Henry D.
1866
. The Theory and Practice of Banking
. 2
vols. London
: Longmans, Green, Reader, & Dyer
.Madigan, Brian F.
2009
. “Bagehot's Dictum in Practice: Formulating and Implementing Policies to Combat the Financial Crisis
.” In Financial Stability and Macroeconomic Policy
, 169
–89
. Economic Symposium Conference Proceedings, Federal Reserve Bank of Kansas City
.Martin, Antoine.
2009
. “Reconciling Bagehot and the Fed's Response to September 11
.” Journal of Money, Credit, and Banking
41
, nos. 2–3
: 397
–415
.Mehrling, Perry.
2010
. The New Lombard Street: How the Fed Became the Dealer of Last Resort
. Princeton, N.J.
: Princeton University Press
.Mehrling, Perry, Zoltan Pozsar, James Sweeney, and Dan Neilson.
2014
. “Bagehot Was a Shadow Banker: Shadow Banking, Central Banking, and the Future of Global Finance
.” In Shadow Banking Within and Across Borders
, edited by S. Classens, D. Evanoff, G. Kaufman, and L. Laeven, 71
–87
. Hackensack, N.J.
: World Scientific Publishing
.Meltzer, Allan H.
1986
. “Financial Failures and Financial Policies
.” In Deregulating Financial Services
, edited by G. G. Kaufman and R. C. Kormendi, 79
–96
. Cambridge, Mass.
: Ballinger
.Mill, John Stuart. (
1826
) 1965
–91
. “Paper Currency and Commercial Distress
.” In vol. 4
of The Collected Works of John Stuart Mill
, edited by J. M. Robson, 73
–123
. Toronto
: University of Toronto Press
.Mill, John Stuart.
1844
. “The Currency Question
.” Westminster Review
41
(March–June
): 579
–98
.Mill, John Stuart. (
1848
) 1965–91. Principles of Political Economy with Some of Their Applications to Social Philosophy
. Vols. 2–3 of The Collected Works of John Stuart Mill, edited by J. M. Robson. Toronto
: University of Toronto Press
.Mill, John Stuart.
1867
. “Réponses de M. John Stuart Mill
.” In Enquête sur les principes et les faits généraux qui régissent la circulation monétaire et fiduciaire
, 5
:589
–96
. Paris
: Ministère des Finances
.Mishkin, Frederic S.
2008
. “How Should We Respond to Asset Price Bubbles?
” Speech at the Wharton Financial Institutions Center
, Philadelphia
, May 15
.Moore, Gregory.
1999
. “Solutions to the Moral Hazard Problem Arising from the Lender-of-Last-Resort Facility
.” Journal of Economic Surveys
13
, no. 4
: 443
–76
.Morgan, E. Victor. (
1943
) 1965
. The Theory and Practice of Central Banking, 1797–1913
. Reprint, London
: Frank Cass
.Neal, Larry.
1998
. “The Financial Crisis of 1825 and the Restructuring of the British Financial System
.” Federal Reserve of Saint Louis Review
80
, no. 3
: 53
–76
.Newmarch, William.
1866a
. “The Financial Pressure and Ten Per Cent
.” Fraser's Magazine
74
, no. 440
: 229
–42
.Newmarch, William.
1866b
. “The Recent Financial Panic
.” British Quarterly Review
44
, no. 87
: 125
–40
.Niehans, Jürg.
1978
. The Theory of Money
. Baltimore
: Johns Hopkins University Press
.Niehans, Jürg.
1987
. “Classical Monetary Theory, New and Old
.” Journal of Money, Credit, and Banking
19
, no. 4
: 409
–24
.O'Brien, Denis.
1984
. “Monetary Economics
.” In Economic Analysis in Historical Perspective
, edited by J. Creedy and D. P. O'Brien, 3
–45
. London
: Butterworths
.O'Brien, Denis.
2003
. “The Lender-of-Last-Resort Concept in Britain
.” History of Political Economy
35
, no. 1
: 1
–19
.Parliamentary Papers
. 1832
. Report from the Secret Committee Appointed to Inquire into the Expediency of Renewing the Charter of the Bank of England, and into the System on Which Banks of Issue in England and Wales Are Conducted
. Vol. 6
. London
: House of Commons
.Parliamentary Papers
. 1840
. Report from the Select Committee Appointed to Inquire into the Effects Produced on the Circulation of the Country by the Various Banking Establishments Issuing Notes Payable on Demand
. Vol. 4
. London
: House of Commons
.Parliamentary Papers (Commons)
. 1848
. Reports from the Select Committee on Commercial Distress with the Minutes of Evidence, Appendix, and Index
. Vol. 8
, pts. 1–2. London
: House of Commons
.Parliamentary Papers (Lords)
. 1848
. Report from the Lords’ Secret Committee Appointed to Inquire into the Cause of the Distress Among Commercial Classes
. Vol. 8, pt. 3. London
: House of the Lords
.Parliamentary Papers
. 1857
. Report from the Select Committee on Bank Acts Together with the Proceedings of the Committee, Minutes of Evidence, Appendix, and Index
. Vol. 10, pts. 1–2. London
: House of Commons
.Peel, Robert.
1844
. Speeches of the Right Honourable Sir Robert Peel, Bart. in the House of Commons, May 6th and 20th, 1844
. London
: John Murray
.Rist, Charles. (
1938
) 1940
. A History of Monetary and Credit Theory from John Law to the Present Day
. London
: Macmillan
.Skaggs, Neil T.
1991
. “John Fullarton's Law of Reflux and Central Bank Policy
.” History of Political Economy
23
, no. 3
: 457
–80
.Skaggs, Neil T.
1994
. “The Place of J. S. Mill in the Development of British Monetary Orthodoxy
.” History of Political Economy
26
, no. 4
: 539
–67
.Skaggs, Neil T.
1995
. “Henry Thornton and the Development of Classical Monetary Economics
.” Canadian Journal of Economics
28
, no. 4b
: 1212
–27
.Skaggs, Neil T.
2003
. “Thomas Tooke, Henry Thornton, and the Development of British Monetary Orthodoxy
.” Journal of the History of Economic Thought
25
, no. 2
: 177
–97
.Smets, Franck.
2014
. “Financial Stability and Monetary Stability: How Closely Interlinked?
” International Journal of Central Banking
10
, no. 2
: 263
–300
.Smith, Matthew.
2003
. “On Central Banking ‘Rules’: Tooke's Critique of the Bank Charter Act
.” Journal of the History of Economic Thought
25
, no. 1
: 40
–61
.Smith, Matthew.
2011
. Thomas Tooke and the Monetary Thought of Classical Economics
. London
: Routledge
.Svensson, Lars.
2017
. “Cost-Benefit Analysis of Leaning Against the Wind
.” Journal of Monetary Economics
90
(October
): 193
–213
.Thornton, Henry. (
1802
) 1939
. An Enquiry into the Nature and Effects of the Paper Credit of Great Britain
. Edited by F. A. von Hayek. London
: Allen and Unwin
.Tooke, Thomas.
1826
. Considerations on the State of the Currency
. London
: John Murray
.Tooke, Thomas.
1838
. A History of Prices and of the State of the Circulation, 1793–1837
. Vols. 1–2
. London
: Longmans
.Tooke, Thomas.
1840
. A History of Prices and of the State of the Circulation, 1838–1839
. Vol. 3
. London
: Longmans
.Tooke, Thomas.
1844
. An Inquiry into the Currency Principle
. 2nd ed., with a supplementary chapter. London
: Longmans
.Tooke, Thomas.
1848
. A History of Prices and of the State of the Circulation, 1839–1847
. Vol. 4
. London
: Longmans
.Tooke, Thomas, and William Newmarch.
1857
. A History of Prices and of the State of the Circulation, 1848–1856
. Vols. 5–6
. London
: Longmans
.Wood, Elmer.
1939
. English Theories of Central Banking Control, 1819–1858, with Some Account of Contemporary Procedure
. Cambridge, Mass.
: Harvard University Press
.Copyright 2025 by Duke University Press
2025
Issue Section:
Articles
