Lombard Street

THE MONEY MARKET. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis y i y v v Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis LOMBARD STREET \Description of the <3&oney <J&arket. by WALTER BAGEHOT rwith a new INTRODUCTION by Frank C. Genovese Batson SE^J 2 2 IX/ FtDERAL RESUVE BANK OF NEW YORK HYPERION PRESS, INC. Westport, Connecticut Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Published in 1962 by Richard D. Irwin. Inc., Homewood, III. Introduction Copyright. 1962, by Richard D. Irwin. Inc. Reprinted by permission ol* the copyright owner. Hyperion reprint edition 1979 Library of Congress Catalog Number 78-59001 ISBN 0-88355-677-4 Printed in the United States of America Library of Congress Cataloging in Publication Data Bagehot, Walter, 1826-1877. Lombard Streep Reprint of the 1962 ed, published by R. I>. Irwin, Home wood. III. I. Banks and banking—England—London. 2. Banks and banking—Great Britain. 3. Finance—England—Lon don. 4. Finance—Great Britain. I. Title. [HG3000.L82B3 I979bj 332.1 'I '09421 78-59001 ISBN 0-88355-677-4 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis INTRODUCTION by Frank C. Genovese C e n r a l b a n k in g , the art of tht banker’s bank, has grown out of a troubled past. Its stages of evolution are marked by three great docu ments, Lombard Street, the Macmillan Report, and the Radcliffe Report. Each of these arose out of the accumulated concern with the progress of events in the world. Each represented a search for answers to urgent questions of its day. The reports deal largely with the adjustments and modifications of British central banking to external difficulties and problems. The Macmillan Report appeared as the world crumbled into the depres sion of the 1930’s. TTie Radcliffe Report of 1959 appeared in an epoch of shaky alliances ai.d emerging trading blocs. Both followed a period of inflation and international readjustment after the holocaust of war. It was in the aftermath of war also that emerging capitalism and deposit banking fell into the difficulties which led to the production of the greatest of the documents, Lombard Street. Priority in time gave it the task, not of suggesting necessary modifications in central banking, but the more vital one, of enumerating the prime func tions of a central bank. It created the concept of a central bank and thereby has for all time assured to its author a secure position in bank ing thought. The Macmillan and Radcliffe studies are the works of many men who had staffs and the benefit of much data. Lombard Street is the product of only one man, Walter Bagehot, and as such reflects his deep understanding and intimate knowledge of banking, business and fiscal affairs. Its ideas were first expressed in a series of articles in The Economist during the 1850’s and were put into book form in 1870. During his relatively short lifetime (1826-1877) Bagehot wrote extensively on a wide range of literary, political, and economic sub jects. His collected works run into five substantial volumes. While obviously a many faceted man, his main interests lay in the broad field of political economy and his chief occupation was that of editor of The Economist, the world’s most influential financial paper. Bagehot was born into a banking family and succeeded his father as vice chairman of Stuckey’s Banking Co. of Langport, Somerset. v Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis vi INTRODUCTION. He represented the bank in the “G ty” (i.e., London’s financial dis trict.) Although he was educated as a lawyer, literary and financial matters were more attractive to him than was the law. It was through his interest in free trade that he met James Wilson, the editor and owner of The Economist. This encounter led to his marriage to Wilson’s daughter, Eliza. When Wilson died while serving on a governmental mission in India, Bagehot became editor of the paper. He was the ideal editor for this journal. His brilliance and his writing style, which, like his conversation, was challenging, provoca tive, and yet often amusing, aided the growth of The Economist's cir culation. Descriptions of Bagehot by his contemporaries abound with the adjectives “alert,” “sagacious,” “speculative,” and “witty.” His “originality,” “force,” “acuteness,” and “inventiveness” have been praised. John Morely spoke of these things and “above all the quaint and whimsical humour of that striking genius.” Others spoke of his “vivid sense of reality and strong impulse to unite theorizing with practical problems.” His qualities became those of The Economist, and its influence grew steadily under his stewardship. Bagehot occupied a position in British financial affairs similar to that which Walter Lippman holds regarding American foreign affairs. The British Prime Minister Gladstone called him “the permanent Chancellor of the Exchequer.” This title was merited not only by his constant commentary on the state of the nation and its financial affairs, but by the singular fact that he invented the Treasury Bill. In 1877 Sir Stafford Northcote, the then official Chancellor of the Exchequer, sought Bagehot’s counsel on what might be done to raise needed funds in the light of the unpopularity which Exchequer Bills were currently facing. Bagehot at oncc said that what the Treasury needed was a security which resembled as closely as possible a com mercial bill of exchange. In other words, it should be short term, highly negotiable and should be sold on a discount basis. His inven tion has been a spectacularly successful one. Treasury bills are an important instrument of governmental finance in virtually all devel oped countries today. Lombard Street shows the marriage of theorizing and concern with problems which is so typical of Bagehot. The book describes the origin and operation of the English money market and the nature of the role of the Bank of England in that market. Its comments on the nature of banking and bankers are brilliant and represent the sharing of the experience of a sophisticated man of affairs. But Lombard Street is also a piece of advocacy. It urges reform and modification Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis INTRODUCTION. vii rather than reformulation and reorganization. The advocacy has been successful although the battle was won only over a rather long period of time. It took time to (as Keynes saw Bagehot’s purpose) “knock two or three fundamental truths into the heads of City magnates.” The book is easy to read and every budding economist and banker should read it early in his career. The novice can learn much in seeing the situation out of which Bagehot’s recommendation of proper banking principles arose. He has the experience of watching the growth of banking practices similar to that which the law student re ceives in his study of the development of case law. He acquires a kind of institutionalism in his view of economic matters that is hard to convey in any other fashion. This is an exciting view of economics. The world is seen as it really is. The future is found to evolve out of the past as old institutions are progressively adapted to meet changing problems. Perhaps it was his legal training that gave Bagehot’s writings their institutional overcast and influenced him to draw little distinction between description and theory. His approach is in many ways simi lar to that of Wesley Clair Mitchell. For both of them economics clearly had time and space dimensions. Bagehot held that one reason for the dullness of much political economy was its attempt to be uni versal. Consequently he confined his efforts to problems of the day. It may be proper to say that his economics even had personality dimensions since Lombard Street discusses bankers almost as much as it does banking. On this score one feels a twinge of sympathy for Mr. Aloxon whose ill-advised actions at the General Court of the Bank of England are recorded for posterity in Bagehot’s Appendix. The inci dent there reproduced illustrates the way not to get things done in a meeting. In a Memoir to Bagehot, R. H. Hutton, his associate for many years says, “. Bagehot’s most original writing was due less to his deductions from the fundamental axioms of the modem science than to that deep insight into men which he had gained in many dif ferent fields.” It is these last mentioned features which the profes sional reader of Lombard Street savors. And thus we see why Lombard Street is a classic. It is absorbing on first reading to the young and delightful in the rereading by their elders. There is little point in summarizing here the principal ideas of this pellucid book. The reader will enjoy the original much better than any summation. However, a brief mention may be made of its formal scope. It explains the origins and operation of British banking Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis INTRODUCTION. and bill trading. It sets forth the relations that exist between the Bank of England, other banks, bill brokers, the Government, and foreign countries. It also explains the relationships which should exist. Not generally appreciated, in spite of W. W. Rostow’s essay on the matter, is Bagehot’s strikingly modem ideas of the nature and functioning of the business cycle.

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