To whom on what?

The rule laid down by Bagehot was that loans should be granted to all
comers on the basis of sound collateral ‘as largely as the public asks for
them.’46 But in his testimony before the 1875 inquiry, two years after the
publication of Lombard Street, Bagehot resisted the suggestion that last-
resort lending be turned over to a body of commissioners appointed by
the government on the grounds that they might make loans to ‘improper
persons.’ They would be subject to political pressure while the Bank of
England is ‘a body withdrawn from the political world and not subject
to political pressures.’47
Bagehot’s suggestion that central banks are immune from political
pressure seems naive. The dilemma about collateral is that its soundness
depends on when and whether the panic is stopped; the longer the panic
continued, the sharper the decline in the prices of securities and bills of
exchange and commodities and hence the less sound the collateral. In
this case, it becomes necessary to look at the character of the borrower,
something that J.P. Morgan was reported to consider exclusively. Here
the dilemma relates to the wry comment that bankers lend money only
to those that do not need it.
Central banks typically have rules.48 When the rules cannot be easily
broken—as in the Federal Reserve Act of 1913, which permitted only gold
and negotiable bills of exchange but not government securities to be held
as reserve against Federal Reserve notes and demand deposits—there is
frequently trouble. There is also trouble when rules are too readily bro-
ken. The beauty of the Chancellor of the Exchequer’s letter of indem-
nity was that it preserved the rule while violating it and did not create a
precedent, at least not for a time. The Bank of France and the Reichsbank
occasionally discounted only three-name paper. But discretion to reject
paper because it was ‘unsound’ or the borrower because of his character
gave the lender of last resort a life-or-death power that might not always
be used with complete objectivity. The literature is filled with accusa-
tions of venality on the part of the directors of central banks. Protestant
and Jewish directors of the Bank of France were alleged to have punished
the Catholic (and worse-off) supporters of the Union G ́ n ́ rale in 1882,
e e
while saving the insider Comptoir d’Escompte in 1888.49 In the crisis
of 1772, the Bank of England’s issuance of new regulations about dis-
counting and refusal to discount doubtful paper were interpreted as an
attempt to break the Jewish houses in Amsterdam that had been most in-
volved in the speculation. Then there was the Bank’s decision to refuse

the bills of Scottish banks, and finally to stop discounting altogether,

which was probably ‘a step taken quite deliberately to break up a group

of Dutch speculators.’50 Outsiders particularly suffered. The Bank of the

United States was allowed to fail in New York in December 1930 by a

syndicate of banks amid accusations that the Bank was being punished

for its pushy ways.51

The rule of discounting for everyone with good paper evolved slowly

in Great Britain. For a time ‘the invariable practice’ was respectable Lon-

don names on paper with no more than two months to run; but this

description of 1793 is accompanied by a statement that while a request

from Manchester had been turned down (along with one from Chi-

chester, where refusal helped to bring a bank down), £40,000 had been

advanced to Liverpool banks. Only in July 1816 did the Bank, break-

ing a rigid precedent, agree to accept ‘country securities of undoubted

respectability if the firm cannot get enough London names.’52

The fact is that the Bank of England made advance on a wide range of

different types of assets much beyond two-name paper. In 1816 the Bank

broke its rule against lending on mortgages, undertaking a ‘Transaction

quite out of the ordinary course of Business’ to relieve the distress of

poor people in the Black Country. The Bank resolved to lend only in

the old way ‘on notes of respectable parties’ but a few years later the

Bank began a regular mortgage business on the ground that the volume

of discounts and especially the income from discounts had collapsed—a

private rather than a public purpose.53 At one stage the Bank even made

loans on the security of a mortgage on a plantation in the West Indies

(ultimately the Bank foreclosed on this loan54 ) and on unimproved land

in England. The land was unencumbered by mortgage but belonged to

a duke, an indication that collateral and the character (or status) of the

borrower were not unrelated. Loans were not made on land in Scotland

or in Ireland.55

With the growth of railroads, Bank of England loans were made on the

collateral of railroad debentures. In 1842, as the second railway mania

got under way, the Bank voted to make an occasional loan to firms in

difficulty and to well-tried firms for development.56 The Bank of France

began lending to a railroad syndicate in 1852; in fact, it was accused

of supporting, if not starting, the feverish speculation in railroads.57

Walter Bagehot thought the Bank of England mistaken for not lending

on railroad debentures when it did so on consols and Indian securities;

Bagehot stated that a railway was less liable to unforeseen accidents

than the Empire of India.58 But Indian securities were guaranteed by the

Colonial Office and in effect were British government obligations.

Exchequer bills were issued on the collateral of goods, as were Ad-

miralty bills in Hamburg. Clapham observed that many of the Bank’s

advances in 1825 were not actually on goods but rather on personal

security;59 the Bank loaned freely and was not ‘over-nice.’60 In a few

weeks in 1847 the Bank advanced £2.25 million in both usual and un-

usual ways, including the securities of the Company of Copper Miners,

through which it involuntarily acquired a copper works.61

The rule is that there is no rule. One does not lend to insolvent banks,

except to avoid the mischief that would occur if the Lord Mayor of Lon-

don were to go bankrupt (1793),62 or to maintain for a time a payroll in

Newcastle, a town used to banking disasters.63 The Bank of France had

never discounted as much as 4 million francs for anyone but Jacques

Laffitte when Samuel Welles, an American banker, applied in 1837; he

proved to be an exception.64 (The Laffitte transaction had also been ex-

ceptional, with a political motivation.) The Conseil General could not

abandon such an important bank, so it received a line of credit of 15 mil-

lion francs.65 In the crisis of 1830 the Bank of France discounted royal

and municipal bonds, customs receipts, woodcutting receipts, obliga-

tions of the city of Paris, and canal bonds repayable by lottery.66

Some of the decisions that the lender of last resort must make are

easy, such as whether to discount Treasury bills. Some are difficult, such

as whether to take shaky collateral from shaky banks. The record is full

of firms that were refused help, failed, and paid off 20 shillings to the

pound, and of banks that were helped in one crisis but went down in the

next. The 241-page appendix to Evans’s book on the commercial crisis

of 1857 was devoted to court records of bankruptcies in Britain between

1849 and 1858. The reading is doleful. G.T. Braine, who was refused

accommodation by the Bank of England in 1848, paid 20 shillings to

the pound and ended up with a surplus double that originally estimated.

One also finds petitions in bankruptcy brought by the Bank, as against

Cruikshank, Melville and Co., for the unpaid residue of a bill it drew on

another bankrupt firm that had paid only 12s. 6d. to the pound.67

Even the judgment of history is not always helpful. The Bank of En-

gland first refused to help the three American ‘W banks’ (Wiggins,

Wilsons and Wildes) in the fall of 1836 and then relented and advanced

them credit in March 1837. Andr ́ ad` s noted that the Bank took a bold

e e

step and had no occasion to regret its courage.68 Clapham held on the

contrary that the Bank lent most reluctantly and was not surprised when

Wilsons and Wiggins failed at the end of May and Wildes thereafter and

the consequence was ‘a long, dreary tale of debt lasting 14 years.’69 To

Matthews, the Bank of England’s aid to the three banks ‘in the vain hope

of avoiding their suspending was a matter of faulty judgment but the

principle on which they operated was a sound one.’70