Discussion — Reading 4: Walter Bagehot

This session covers Reading 4: Chapter VII of Lombard Street by Walter Bagehot.

• Bagehot Study Questions

This chapter explains the workings of the Bank of England's reserve management system in the second half of the 19th century. It is here that Bagehot describes the central banking approach that would later become known as the Bagehot rule or principle: In times of crisis, lend freely at a high rate against good security (collateral). The Banking Department of the Bank of England managed the equivalent of a single centralized monetary reserve for all of England, and eventually the world.

From the course website:

"This is the chapter that contains the famous "Bagehot Rule" for central bank intervention during a crisis, so watch for it, and try to understand the logic that led Bagehot to the formulation. If you want more Bagehot—and who doesn't?—the whole book is available for free here. It is one of the classics of Victorian literature, according to me, quite apart from its foundational importance for monetary economics and the theory of central banking."

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