Unusual eminent Victorian
Christopher Fildes reviews a new biography of Walter Bagehot
My law of banking says that disasters happen when the last man who can remember what happened last time has retired. Yes, the earth shook — but that was a dozen years ago, memories fade, the fault-lines are quiescent… This time, so we are always tempted to think, it’s different.
Walter Bagehot knew better. When the City of London was by far the world’s biggest market in money, he had watched the cycle come round. All people, he told us, are most credulous when they are most happy — until credulity turns to panic. He set out to diagnose that panic and to prescribe for it, and his analysis has been accepted and his medicine prescribed to this day — or, at least, that is what it says on the label. Warning: it may not quite be the mixture as before.
So we can thank James Grant, historian and student of markets, for conjuring up this unconventionally eminent Victorian. He grew up in a family of West Country bankers and could learn from example, for their’s became the last bank to issue its own notes in competition with the Bank of England. He worked for it and prospered from it, but his instinct and gift was to write. His father-in-law, James Wilson, had founded a magazine, tersely entitled The Economist; or The Political, Commercial, Agricultural and Free-Trade Journal. Bagehot became its editor. From then on there was no holding him.
He brought to The Economist’s pages the breezy self-assurance that remained its hallmark. He backed the wrong horse in the American Civil War — but then, so did his friend Mr Gladstone. He went on to lay down the law about the nation’s constitution, firmly telling Queen Victoria that her role was to be consulted, to encourage and to warn. Opposed to bribery, he fought a by-election against a candidate who was in favour. Bagehot’s team bribed, too, against his wishes, but underspent, and he lost by seven votes.
Then came a banking disaster: Overend Gurney, “corner house” of the City’s money market, collapsed and threatened to bring the whole market down with it. Hurrying to the general rescue, the Bank of England had spent half its reserves (so its Governor claimed) before the Chancellor of the Exchequer had got out of bed. Quite right, said Bagehot.
Quite wrong, said Thomson Hankey, himself a former Governor. If bankers knew that they would be bailed out when they got into trouble, he said, they would find their way back into it. Ready money, they had to remember, was a most valuable thing. If they strayed too far from it in search of more rewarding investments, they would find that these could not be turned into cash when they needed it.
Hankey rounded on Bagehot: “Unless such a doctrine is repudiated, the difficulty of pursing any sound principle of banking in London will always be very great.”
This blast drew from his opponent what Grant rightly calls his monetary masterpiece: Lombard Street. Short, vivid, lucid —“it is the writer’s fault if what he says is not clear” — it depicts the money market as a specialised branch of human nature. A panic, he says, is a kind of fever, it is contagious, and it must not be starved.
The cure is to make money plentiful. The Bank, as custodian of the nation’s reserves, must deploy them down to the last shilling — but always lending against good security, and always at a rate of interest that gives nothing away. In time, calm will return and credit revive.
Bagehot’s argument has held sway ever since, but in our own century it has been tested to the limit. Banks have grown until they are deemed to be too big to fail — or, more simply, too big. They hire performers who may be paid fortunes to take chances; heads they win, tails their employers lose and the rescuers have to pay up. The mistakes of a sanguine manager, so Bagehot warns us, are far more to be dreaded than the frauds of a dishonest manager. How sanguine was Fred Goodwin at the Royal Bank of Scotland?
They have left the rescuers grasping for security and pouring out money, not, as Bagehot prescribed, at a rate of interest that gives nothing away, but on terms that give almost everything away, rendering it free of charge or even cheaper. The losers are the savers, left to search far and wide, in distant markets or among showy new business models in the hope of a worthwhile return — perhaps pinning their hopes on chimeras, just as they did in Bagehot’s day. That ended in tears. They might now come to think that Thomson Hankey, that crusty Victorian, had a point.
I once had the impertinence to tell Mervyn King, when he was Governor of the Bank, that I thought he was a closet Hankeyist. James Grant, as Bagehot’s biographer, stands some way out of the closet. He has given us a splendid account of a Victorian whose ideas are still painfully topical. It may be too much to hope that minds as vigorous as Walter Bagehot’s are getting ready for the next crisis.
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