Lombard Street: A Description of the Money Market (1873) is a book by Walter Bagehot. Bagehot was one of the first writers to describe and explain the world of international and corporate finance, banking, and money in understandable language. The book was initially printed in Great Britain by Henry S. King & Co. in 1873.

Overview

The book was in part a reaction to the financial collapse of Overend, Gurney and Company, a wholesale discount bank located at 65 Lombard Street, London. Lombard Street was a historic center of the London banking industry from medieval times to the 1980s, from which the book draws its title. When Overend, Gurney and Company suspended payments on 10 May 1866, panic spread across London, Liverpool, Manchester, Norwich, Derby and Bristol.

Lender of last resort

Lombard Street is known for its analysis of the Bank of England's response to the Overend-Gurney crisis. Bagehot's advice (sometimes referred to as "Bagehot's dictum") for the lender of last resort during a credit crunch is summarized by Charles Goodhart as follows: (Nonetheless, Goodhart emphasizes that many of these ideas were spelled out earlier by Henry Thornton's book The Paper Credit of Great Britain.) Bagehot's dictum has been summarized by Paul Tucker as follows: High rates that cause losses to the firm may be too high, say higher than the interest rate the firm or bank is earning from the same asset it is placing as good collateral. Therefore, the highest interest to charge a bank for its good collateral without causing losses to it would be the same prevailing interest rate for said instrument or loan. In 1870 Britain the interest rate paid by the British Government for its annuities was 3.00% therefore a rate of 3.50% would have caused a loss of capital for a bank pledging this instrument as collateral. We also have to consider that a bank has assets higher than its capital so any loss would cause a higher loss of equity for the bank, and it is not in the best interest of the central bank to cause high losses of equity to the firms making up its banking system. Therefore, if the asset has an interest rate of 3.00% a high central bank rate would be 2.50% without causing a leveraged loss of capital to the bank. Take for example the Bank of England's bank rate of 0.10% and the United Kingdom's 10 year Gilt at 0.65% on 14 July 2021. In Bagehot's own words (Lombard Street, Chapter 7, paragraphs 57–58), lending by the central bank in order to stop a banking panic should follow two rules: