Who is the lender of last resort?

The lack of clear agreement in Great Britain about whether the Treasury
should relieve panics through the issue of Exchequer bills or whether
instead the Bank of England should discount freely at a penalty rate, even
if it is necessary to suspend the limits imposed by the Bank Act of 1844
has already been noted. Uncertainty about the answers to these questions
may be optimal, along with the question of whether the governmental
authorities will come to the rescue and whether they will arrive in time if
they decide to come. Thus there was no explicit provision for a lender of
last resort in Great Britain and no fixed rule as to which agency should fill
this role. In 1825 the Exchequer was not the selected agency. The task was
given resolutely to the Bank of England whose reluctant acceptance was
‘the sulky answer of driven men.’21 In 1890 guarantees were used rather
than the Bank or the Exchequer. Gradually the responsibility devolved
on the Bank, which led Alfred Marshall to write that ‘its directorate came
to be regarded at home and abroad as a committee of safety of English
business generally.’22
The Bank of France had agreed by the 1830s that it had responsibilities
in a crisis but it thought it had other responsibilities as well, such as
to ensure monopoly of the bank note circulation which permitted it
to let the regional banks fail in 1848 and then to convert them into
subsidiaries (comptoirs). The provinces had been fearful of Paris; they
wanted the privilege of note issue for their own regional banks because
of the concern that in a crisis Paris would take care of its own needs

at the expense of the regions. But after Le Havre acquired a bank, the

mistake was making too many illiquid industrial loans, including those

to shipyards and to importers of cotton when its price was falling. In

February 1848 the Banque du Havre made a trip to Paris. ‘The return was

not glorious. The Bank of France had been impitiable.’23 It refused to

lend on mortgages, saying, ‘The statutes forbid it, and you have refused

to accept a comptoir.’ 24

The Bank of France wavered over this question even as it wanted to

destroy the regional banks. From America, Chevalier observed that the

Bank of France had discounted freely in 1810, 1818, and 1826—with

Jacques Laffitte as governor for the first two years—making great efforts

to sustain commerce; but it lacked the same courage in the crisis of

1831–1832.25 In 1830, after the revolution, the task was left to local

authorities. A regional bank, conducted with honesty but not prudence,

threatened a provincial crisis. The local receiver general undertook to

discount its doubtful paper, apparently after consulting Paris, where,

Thiers testified, after ‘mature reflection the public interest was put above

that of the Finance Minister, M. Louis,’ ‘with happy results,’ that is, the

avoidance of the collapse of the bank and a resultant disturbance.26

After it achieved its monopoly of the note issue and the conversion of

the banks in the regions into branches of the Bank of France, the Bank

began to act as a lender of last resort. Its statutes required it to discount

only three-name paper; the task became one of producing acceptable

names. Sixty comptoirs d’escompte were established throughout France,

as well as a number of sous-comptoirs organized by various branches of

trade to hold stocks of goods and issue paper against them. With the

names of the merchant, the sous-comptoir, and a comptoir, the Bank of

France could discount the paper and relieve the liquidity crisis. Louis

Raphael Bischoffsheim of Bischoffsheim & Goldschmidt mocked the re-

quirement of three names: ‘The number is not important. With bad

signatures one can collect 10 instead of three. I prefer one good to 20

bad.’27 After the crisis was over, a number of the comptoirs were taken

over by bankers, merchants, and industrialists and became regular banks.

The most famous of this group the Comptoir d’Escompte de Paris took

its place among the leading banks in the country.28

The Cr ́ dit Mobilier of the Pereire brothers was not saved in 1868: on

e

this occasion, the Bank of France refused to discount its paper, which

might be interpreted as the revenge of the establishment on an outsider,

the Rothschilds against the Pereires who had once worked for them;29 as

punishment for not conceding the Banque de Savoie note issue to the

Bank of France when the Pereires took over the Savoy bank after the re-

gion had been ceded to France by Italy in 1860; or as the entirely normal

refusal of a lender of last resort to bail out an insolvent institution.30

Cameron accuses the Bank of France of conducting guerrilla warfare

against the Pereire brothers in the interest of a Rothschild-Pereire quar-

rel that went back to the 1830s.31

The Bank of France and Paris bankers again did not come to the res-

cue of the Union G ́ n ́ rale in 1882 but seven years later they rescued

e e

the Comptoir d’Escompte de Paris. Critics of the Bank of France ascribe

the difference in outcomes to venality. A less emotional position asserts

that a second large bank failure in seven years might have completely

destroyed the French banking system and that on this account Rou-

vier, the minister of finance, took the necessary measures to have the

Bank of France and the Paris banks advance 140 million to the Comp-

toir d’Escompte.32 In the Union G ́ n ́ rale operation, as was noted in an

e e

earlier chapter, the Paris banks withdrew from the speculative activity

when it began to peak in August 1881 and advanced 18.1 million francs

to the Union G ́ n ́ rale after the crash the following January to permit its

e e

more orderly liquidation rather than to save the bank.33 Led by the Roth-

schilds and Hottinguer, and including the Comptoir d’Escompte and the

Soci ́ t ́ G ́ n ́ rale (but not the Lyons rival of Bontoux, the Cr ́ dit Lyon-

ee e e

e

nais), the consortium represented the establishment, in which it was

not really necessary to distinguish the Bank of France from the leading

private banks (hautes banques) and deposit banks.

In Prussia the king was the lender of last resort in 1763. In 1848 various

state agencies, including the Prussian Bank, the Seehandlung, and the

Prussian lottery vainly tried to help the Cologne bank, A. Schaaffhausen,

before it was allowed to reorganize as a joint-stock bank. In the absence

of a central bank in 1763, 1799, and 1857 the Hamburg city government,

the chamber of commerce, and the banks—any and all leading agencies

took part in the rescue operation.

The experience of the United States is especially pertinent to the ques-

tion of the identity of the lender of last resort. There was some ambiguity

as to whether the First Bank of the United States and then the Second

Bank of the United States were lenders of last resort despite the des-

ignation of the Bank in each case as a chosen instrument. On various

occasions, the U.S. Treasury came to the aid of the banks by accept-

ing customs receipts in post-dated thirty-day notes (1792), by making

special deposits of government funds in the banks that were in trouble

(1801,1818, and 1819), and by relaxing the requirement that a com-

mercial bank pay the Bank of the United States in specie (1801).34 After

the failure to renew the charter of the Second Bank of the United States

in 1833, the U.S. Treasury was even busier, both before and after pas-

sage of the 1845 law that required the Treasury to keep its funds out

of the banks. In times of crisis and in periods of stringency caused by

crop movements, the U.S. Treasury would pay interest and/or principal

on its debt in advance, make deposits in banks despite the law, offer

to accept securities other than government bonds as collateral for de-

posits of government funds, or buy and sell gold and silver. Banks began

to look to the Secretary of the Treasury for help in an emergency and

to relieve seasonal tightness. In the fall of 1872, Secretary of the Trea-

sury George S. Boutwell served as a lender of last resort by reissuing

retired greenbacks—which may have been illegal. His successor, William

A. Richardson, did the same thing a year later.35

The U.S. Treasury could absorb money in deposits and pay out cash

surpluses it had acquired in previous periods but apart from the green-

back period it could not create money. For this reason, the Treasury

was unsatisfactory as a lender of last resort, unless it had previously had

budget surpluses and built up its holdings of cash. In 1907, when its

cash holdings were low, the Treasury issued new bonds—$50 million of

Panama Canal bonds, which were eligible for collateral for national bank

notes, and $100 million of 3 percent certificates of indebtedness—that

it hoped would entice existing cash and specie from hoards. In the end,

the crisis was averted by a capital inflow from Great Britain of more than

$100 million.36 Moreover, the devices used to cope with a crisis were

ad hoc. An analysis of the crisis of 1857 suggested that the Federal gov-

ernment was incapable of intervening effectively and that the public,

including the banks, was left without guidance to stem the crisis.37 In

fact intervention proved to be too much and too early.

The complex record of interference by the U.S. Treasury raises the

question of whether the market should not have regulated itself and, if

so, how. O.M.W. Sprague, the historian of the crises under the National

Banking System for the 1910 Aldrich Commission, believed that the

banks should have taken responsibility to ensure that they had enough

reserves to meet all needs.38 But Sprague was vague on which banks

should take this responsibility or why the duty fell on them in the ab-

sence of responsibility embodied in legislation. Noblesse oblige? Duty?

Several statements by Sprague indicate why a limited number of New