The Lender of Last Resort Under the Microscope, c. 1840–1930

This chapter dissects the experience of historical lenders of last resort (LOLR) “on the ground.” It first clarifies what a standard LOLR operation involved at the micro level, how the concomitant balance sheet mechanics played out in practice and why the LOLR limited support to illiquid, but solvent counterparties. The chapter then discusses supply and demand constraints that frequently obviated an elastic liquidity provision by the LOLR. It sheds light on whence these constraints originated, when they resulted in price and quantity rationing by the LOLR, which impacts they had on financial markets, and how the LOLR responded to them. Finally, the chapter analyzes the moral hazard implications of successful lending of last resort and explains how institutions acting as LOLR attempted to address these risks. The conclusion highlights several topics for future research on the historical LOLR. (JEL E58, G28, N13, N23)