Retrospectives: Regulating Banks versus Managing Liquidity: Jeremy Bentham and Henry Thornton in 1802

At nearly the same moment, Jeremy Bentham and Henry Thornton adopted diametrically opposed approaches to stabilizing the financial system. Henry Thornton eloquently defended the Bank of England's actions as the lender of last resort and saw its discretionary management of liquidity as the key s...

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Published in:The Journal of economic perspectives 2020-10, Vol.34 (4), p.195-209
Main Authors: Berdell, John, Mondschean, Thomas
Format: Article
Language:English
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Summary:At nearly the same moment, Jeremy Bentham and Henry Thornton adopted diametrically opposed approaches to stabilizing the financial system. Henry Thornton eloquently defended the Bank of England's actions as the lender of last resort and saw its discretionary management of liquidity as the key stabilizer of the credit system. In contrast, Jeremy Bentham advocated the imposition of strict bank regulations and examinations, without which, he predicted, Britain would soon experience a systemic crisis—which he called "universal bankruptcy." There are strong parallels but also dramatic differences with our recent attempts to reduce systemic risk within financial systems. The Basel III bank regulatory framework effectively intertwines Bentham's and Thornton's diametrically opposed approaches to stabilizing banks. Yet Bentham's and Thornton's concerns regarding the stability of the wider financial system remain alive today due to financial innovation and the politics of responding to financial crises.
ISSN:0895-3309
1944-7965
DOI:10.1257/JEP.34.4.195