Abstract

By granting credit and issuing money, banks take a liquidity risk - that is, the risk of being unable to reimburse its notes in coins. Five 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] [1998]), 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] 1972), Ricardo (1810-1823) and the Currency School (1837-1858), the bank reserve becomes insufficient as a consequence of a diminishing value of money allied with over issues. Third, according to Thornton ([1802] 1939, 1991) and the Banking School (1840-1857), it can occur as a consequence of a falling exchange rate that is not linked with over issues. Fourth, according to Smith (1776) and the Banking School, discounting of fictitious bills, by decreasing the shareholders' funds, leads to bank illiquidity. Lastly, according to Thornton ([1802] 1939, 1991) and Bagehot (1873), the liquidity crisis is a consequence of bank panics: a "flight" to money for Thornton, a "flight" to credit for Bagehot. The analysis of these five different explanations sheds new light on classical monetary controversies.

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call

Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.