Walter Bagehot — An Economists’ Oscar Wilde

Frank Prochaska of Oxford Univ has written this bio on Walter Bagehot, the person who is credited for making the lender of last resort theory decades ago.

Martin Walker of Wilson Center writes this amazing review of the book and remembers Bagehot.

During the years of the recent financial crisis, marked as they have been by heroic, if controversial, measures by our central bankers, one such candidate stood out. It was he who, some 140 years ago, coined the central banker’s golden rule in times of such disaster: The lender of last resort must lend freely, against good collateral, and at interest rates high enough to dissuade borrowers not genuinely in need. For good or ill, our current central bankers have been much more generous, bending this classic mantra which Walter Bagehot first articulated in Lombard Street, the 1873 book that established him as the pioneering theorist of the modern financial system. But Bagehot (1826–77) was far more than just an economist. During his 17 years as the editor of the London-based weekly The Economist, he increased the magazine’s influence and produced a stream of articles and books that, in many cases, are as relevant today as they were in his lifetime.

A decade and a half ago, during the crisis of the British monarchy brought on by the death of Princess Diana, Bagehot was once again the sage whose wisdom was widely cited. Bagehot’s 1867 book The English Constitution stressed the distinction between the “Efficient” part of the system, which did the work, and the “Dignified” (we might say decorative) part, which was symbolically important but functionally feeble. The monarchy, Bagehot noted, provided the dignity, while the royal family offered an institution to the public of comforting familiarity, with wayward sons, mad aunts, saucy grandmothers, and drunken cousins. “A family on the throne is an interesting idea,” he observed. “It brings down the pride of sovereignty to the level of petty life.” Constitutional stability, and not just good manners, required a certain discretion about the regal family’s intimacies. “We must not let in daylight upon magic,” as Bagehot put it.

It is indeed remarkable to consider the many modern tropes Bagehot addressed in the years of Queen Victoria’s reign. In weighing the controversies over the single European currency, there are few better places to start than the preface of his 1869 book A Universal Money, in which he suggested that a good idea in theory may in practice bring unexpected calamities.  In the current debate over the widening gap between rich and poor, it’s worth remembering Bagehot’s observation that “in truth, poverty is an anomaly to rich people. It is very difficult to make out why people who want dinner do not ring the bell. One half of the world, according to the saying, do not know how the other half lives. Accordingly, nothing is so rare in fiction as a good delineation of the poor. Though perpetually with us in reality, we rarely meet them in our reading.” (A curious comment, this, from one who greatly admired George Eliot and visited her regularly in St. John’s Wood, where they would discuss the money markets and the pain she felt in composing her novels.)

Nice bit on Bagehot..

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