Document Type

Case Study

Case Series

Broad-Based Emergency Liquidity

JEL Codes

G01, G28


Although historians continue to debate what exactly sparked the Panic of 1825, it is clear that by December of that year, a widespread bank run had erupted, and bankers flocked to the discount window of the Bank of England. While not yet the central bank, the Bank had special legal authority over note issuance and banking, which led to its operation as a semipublic bank. The Bank refused to accept any explicit commitment to act as a lender of last resort, despite being perceived as such by the market. The Bank initially restricted lending to protect its reserves. This policy backfired, and the Bank swiftly switched to a more expansionary approach to lending. During the depths of the panic, the Bank purchased almost 9 million British pounds sterling (GBP) in bills of exchange (discounts) and made GBP 7 million in advances, which were loans secured against collateral with an agreement to repurchase at a later day (akin to modern day repurchase agreements). This assistance nearly made the Bank insolvent. The Bank also expanded the collateral that it was willing to lend against, including accepting longer maturities. These actions calmed the British money markets, with the activity at the Bank’s discount window subsiding largely by December 24, 1825. Despite this successful crisis intervention, banking sector fragility continued into 1826, when 10% of the banks in England and Wales failed.

Date Revised