Financial History Issue 130 (Summer 2019) | Page 35

THE GREATEST VICTORIAN By James Grant In 1832, Jeremiah Harman, a long-serving director of the Bank of England, testified before a parliamentary committee on how the Bank rose to meet the occasion of the Panic of 1825. It was a desperate time, and the Bank lent money in unprecedented ways. “We lent it by every possible means, and in modes that we never had adopted before,” Harman explained; we took in stock as security, we pur- chased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on deposit of bills of exchange to an immense amount; in short by every possible means consis- tent with the safety of the Bank; and we were not upon some occasions over nice; seeing the dreadful state in which the public were, we rendered every assistance in our power. Bagehot (pronounced Badge-it), who wrote the still-canonical prescription for stopping a run on the banks, Lombard Street, never recommended a policy so extreme. Faced with a crisis, he famously asserted, a central bank should lend freely at a high rate of interest against good banking collateral. He said much more than that, but those words—customarily abbreviated to omit the part about the high interest rate—are invoked to this day. No sooner do the banks bring down a crisis on themselves, or stock prices take a tumble, than the call goes out for the Federal Reserve to infuse the market with emer- gency credit. In his memoir of the Great Recession, The Courage to Act, Ben S. Bernanke, chairman of the Federal Reserve from 2006 to 2014, cited Bagehot more fre- quently than any living economist. Bagehot was a banker, a man of letters and a financial journalist; most famously, he edited the Economist. But he was no economist himself—that is, he made no original contribution to the body of eco- nomic theory. Walter Bagehot It is a comment on the nature of eco- nomics as much as it is on the genius of Bagehot that his dicta on central banking continue to hold sway almost a century and a half after he propounded them. In the physical sciences, progress is cumula- tive; we stand on the shoulders of giants. In economics, the most ostensibly rigor- ous of the social sciences, progress—and error, too—are cyclical; we keep stepping on the same rakes. There is a misconception that Bagehot originated the idea of a lender of last resort. It’s obvious he could not have done so; Jeremiah Harman and his fellow directors were doing more than Bage- hot would later recommend two months before the author of Lombard Street was even born. He did, however, popularize and legitimize the proposition, controver- sial at the time but now taken as revealed truth, that a central bank owed a public duty to private persons dealing with large sums of money. Unfortunately, he seri- ously underestimated the extent to which this supposed obligation would induce people to take risks they would not oth- erwise accept in the absence of expected government help. Perhaps Bagehot himself would agree. He believed—at least, at age 39, when a monetarily astute friend took the trouble to make a careful inventory of his views— that money was gold and silver and that alone. All forms of currency, including the notes of the Bank of England, were credit instruments, no different than personal checks, from which it followed that the government had no business interven- ing in the business of banking. Bagehot came to modify his ideas about financial regulation—but, unacknowledged by the many who approvingly quote him on the imperative of central bank crisis man- agement, he never changed his publicly expressed view about the gold standard or the abomination of fiat currency. Bagehot was not the only virtuoso writer on money and banking in 19th- century England: Karl Marx, London cor- respondent for the New York Tribune, was an accomplished financial reporter (bear markets brought out the best in him). George Goschen’s brilliant matched set of essays, “Two Percent” and “Seven Per- cent,” can be read for sheer pleasure—no small feat considering the subject matter is interest rates. Yet Bagehot—eclectic, fearless, aphoristic, prolific—stands apart. The 20th-century American journal- ist A.J. Liebling said of himself that he wrote faster than anyone who wrote bet- ter, and better than anyone who wrote faster. Bagehot made no such claim—it would have been un-English. But with a glance at periodical journalism in the 1850s, 1860s and 1870s, the boast would have been defensible. An adviser to statesmen, notably the Liberal parliamentarian and long-serving prime minister William E. Gladstone, he himself failed to win election to Parlia- ment in three attempts. Nor did he make a fortune in the City of London. His writing is what secured his reputation. As a finan- cial journalist, the editor of the Economist possessed another, apolitical virtue: his paper was evidently incorruptible. Bagehot himself, like many in the age before antibiotics, was susceptible to bron- chial disease—yet during the period of his worst illness, he produced his most cele- brated work. In sickness or health, he wrote as few have ever written, before or since.  James Grant, financial journalist and historian, is the founder and editor of Grant’s Interest Rate Observer, a twice- monthly journal of the investment mar- kets. His book, The Forgotten Depres- sion, 1921: The Crash That Cured Itself, a history of America’s last governmentally unmedicated business-cycle downturn, won the 2015 Hayek Prize of the Manhat- tan Institute for Policy Research. This article was reprinted from Bage- hot: The Life and Times of the Greatest Victorian. Copyright © 2019 by James Grant. 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