ABSTRACT
In a working paper entitled ‘The Lender of Last Resort: Some Historical Insights’, Michael Bordo concludes that successful lender-of-last-resort policies have, on several historical occasions, prevented banking panics.2 Since banking panics are expensive, avoiding them is certainly a good thing. Unfortunately, supporting banks in distress is also not free. Trust in the banking system may be both more valuable and more costly to achieve and maintain in an economy with illiquid capital markets, since such an economy is likely to suffer from volatility in both the price and the accessibility of credit. How the lender-of-last-resort activities are administered and financed thus affects not only the banking system but the economy as a whole. This paper examines how such policies were implemented in Sweden under the classical specie standard during the period 1834-1913.
