Published by EH.Net (November 2019)

James Grant, Bagehot: The Life and Times of the Greatest Victorian. New York: W.W. Norton, 2019. xxxi + 318 pp. $29 (hardcover), ISBN: 978-0-393-6091-6.

Reviewed for EH.Net by Perry Mehrling, Pardee School of Global Studies, Boston University.

James Grant views Bagehot (1826-1877) fundamentally as a financial journalist, indeed a master of the “near-literature of high journalism” (p. 293), which is to say someone much like himself. His evident deep admiration rests fundamentally on appreciation of Bagehot’s distinctive writing style, and also of his astonishing productivity as editor of The Economist. It takes one to know one.

But Grant writes also as a confessed libertarian deeply distressed by the use that has been made of Bagehot’s Principle, which recommended central banks in a crisis to lend freely at a high rate, by successive generations of central bankers and specifically by Ben Bernanke during the financial crisis of 2007-09. How could Bagehot, a conservative banker in his bones, and a political liberal committed to free trade and the gold standard, have lent his authority to the disastrous doctrine that birthed too-big-to fail? “If an archaeological seeker of the origins of the socialization of risk in high finance wants to find clues, let him or her begin with an excavation of Lombard Street” (p. 268). Bagehot’s advocacy for lender of last resort was of course controversial in his own day. Grant makes clear that on this matter he sides with Bagehot’s antagonists — George Norman, Thomson Hankey, Lord Overstone — rather than with Bagehot himself.

It was not Bagehot’s only lapse of judgement. In his commentary on the American civil war, Bagehot famously supported the South rather than the North, and wrote disparagingly of President Lincoln, although he was quick to change sides once the North surprisingly prevailed. Grant chalks that earlier misjudgment up to class bias, and goes on to suggest that misjudgment on lender of last resort may have similarly stemmed from the distorting effect of self-interest, since Bagehot was a stockholder in Stuckey’s Bank. So long as the Bank of England was willing to hold reserves for the rest of the banking system and to lend them freely in times of stress, banks like Stuckey’s could safely hold less reserves themselves and also run higher leverage on any given capital base, so generating greater profits and paying out higher dividends.

As biography, this book is a ripping read, painting a vivid picture of the man warts and all, not hiding his lifelong misogyny and “scorn for those he considered lesser beings” (p. 229), situating him not only in his time (“age of discussion”) but also among his contemporaries, many of whom are brought alive in brief biographical sketches. Like Bagehot himself, Grant is a compelling writer, and also an empathetic storyteller, and he has quite a story to tell.

Born the son of Watson Bagehot, a partner in Stuckey’s Bank, Walter Bagehot was from the beginning a brilliant student. Study of law shaped his intellect, but did not ultimately enable him to avoid following in his father’s footsteps as a country banker. Resigning himself to fate, he apparently resolved to use the spare time afforded by his profession to pursue authorial ambition, initially literary. These writings brought him to the attention of James Wilson, editor of The Economist, and that’s where the financial journalism began, most significantly with a three-part series criticizing the 1844 Bank Charter Act, signed simply “A Banker.” Marrying Wilson’s eldest daughter Eliza, Bagehot in effect joined the firm, and upon Wilson’s premature death in 1860 took over as editor himself, again resigning himself to apparent fate.

In subsequent years, Bagehot earned his living as a country banker and earned renown with his pen, but the biggest disappointment of his life was his repeated failure as a politician. A close and trusted advisor of the Liberal leader William Gladstone, Bagehot nonetheless never managed to win his own place in the House of Commons, though not for lack of trying. Indeed Grant goes so far as to paint Bagehot’s masterwork The English Constitution (1867) as a kind of campaign document, establishing “Bagehot’s reputation as the keenest political, social, and financial observer of his day” (p. 185). Finally accepting political failure, Bagehot turned his attention instead to economics, starting with Lombard Street in 1873. But this venture was cut short by his premature death in 1877, yielding only a collection of essays Economic Studies (1880) published posthumously by his friends. Thus Bagehot never managed to win a place in the pantheon of economists either. He would of course become famous for the Principle that bears his name, but for Grant that is more a mark of shame than of pride. Better to celebrate his brilliant financial journalism.

It’s a nice story but for me, sometime monetary historian as I am, the biggest weakness is the failure to place Bagehot properly within the history of economic thought. We hear how Bagehot cut his eyeteeth at The Economist on critique of the Bank Charter Act of 1844, which divided the Bank of England into an Issue Department that issued notes against gold, and a Banking Department that discounted bills and made advances. But we hear nothing much about the raging economic debate that surrounded that Act, a debate that pitted the so-called Currency School against the Banking School. Pretty clearly, Bagehot weighs in on the Banking School side, insofar as he insists on the credit character of bank notes, and the importance of bank deposits as close money substitutes. But there is no mention of the classic Banking School texts of Thomas Tooke (1844) and John Fullarton (1845), both of which famously emphasized the supposed self-regulating mechanism of flux and reflux, whereby a credit currency expands and contracts to meet the needs of trade. It’s an important omission because, against this historical background, Bagehot’s contribution to economics seems more considerable than Grant admits. Simply put, Bagehot more than anyone else was responsible for separating the Banking School from the doctrine of laissez-faire. As Bagehot himself put it in Lombard Street: “Money will not manage itself, and Lombard Street has a great deal of money to manage.”

Grant misses this because of course it is exactly what he finds most objectionable about Bagehot. Just so, he quotes the passage just cited (p. 272) but makes clear that he sides with the “more far-sighted” Hankey who, in his stolid Principles of Banking, anticipates the eventual bad consequences of deviation from strict laissez-faire. “A century and a half after Bagehot and Hankey stopped quarrelling, it is the great author’s obscure, rhetorically overmatched adversary whose foresight shines brighter” (p. 281). Bagehot did not originate the idea of lender of last resort. “He did, however, popularize and legitimize the proposition, controversial 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 … a special obligation to the citizens who present themselves as borrowers and lenders, investors and speculators” (xiv, xvi).

Here, I’m sorry to say, Grant’s libertarian blinders lead him seriously astray as a biographer. For Grant, “the underlying question was one of political philosophy” (p. 32). Not so for Bagehot, practical banker as he was. Indeed, I would suggest that for Bagehot the problem of managing Lombard Street was nothing more than the problem of managing Stuckey’s Bank writ large. The central bank is, after all, a bank, albeit at a higher level in the system.

In Bagehot’s day, the basic banking business was the discounting of 90 day commercial bills, earning the spread between the yield on those bills and the cost of funds, a rate of zero for bank notes (Stuckey’s notes as well as Bank of England notes) but positive for bank deposits (Stuckey’s as well as the Bank of England’s). In good times commercial bills are self-liquidating, bringing a regular flow of cash into the bank as repayment which is available to meet any deposit withdrawal or note redemption. Occasional default can be absorbed in bank capital, and cash flow disruption can be absorbed from reserve holdings and rediscount with other banks, ultimately with the Bank of England. The secret of safe banking is therefore to confine bank assets to these self-liquidating commercial bills, eschewing especially long term mortgage credits which not only lock up funds during the term of the mortgage but also have no natural source of liquidation even at maturity, short of selling the underlying referenced property. Discount houses that stray into speculative lending, as did Overend Gurney, get their comeuppance in times of tight money when they find themselves unable to meet their cash flow commitments from their illiquid asset holdings.

The problem however comes not so much from the failure of a single overextended firm but from the generalized scramble for cash that can follow. That’s where lender of last resort comes in. So long as the problem is merely an internal drain, which is to say domestic customers demanding notes rather than deposits, Bank of England notes rather than Stuckey’s notes, and even gold rather than Bank of England notes, the problem is inherently manageable. It’s really just a balance sheet operation, and once the panic subsides holders of zero-yielding gold and notes can be expected gladly to replace emergency central bank lending at a more reasonable but positive yield. The problem is harder in the case of an external drain, when foreign customers not only demand gold but also take it out of the country. If a high discount rate fails to stem that tide, then suspension of convertibility becomes inevitable. Those left holding notes just have to wait for resumption, or sell their notes for whatever the market will bear, so realizing a loss.

Grant’s account largely avoids engagement with these dynamics of panic, which threaten good banks as well as bad banks. His mantra throughout the book is Hankey’s mantra, “A good banker had no need of a central bank and a bad banker had no claim on a central bank” (p. 164), and he imagines that were it not for the artificially imposed monopoly of the Bank of England, reserves would be decentralized with each bank taking care of its own needs. But Bagehot’s whole point is precisely that, in a crisis, even good bankers may have need of a central bank. (Indeed, even good central bankers may have need of suspension of convertibility.) Confining bank assets to purportedly self-liquidating bills does no good when market disruption prevents your borrowers from paying you. It is just not true that commercial bills “automatically” liquidate, as Grant asserts (p. xxv). Would that it were.

But Bagehot was about a lot more than just lender of last resort. Although a conservative traditional banker himself, he realized that in his time it was becoming increasingly impossible to confine the social role of banking merely to the discount of commercial bills. Longer term finance was crucial for the capital development of the nation, and England was quite rightly following the innovation of France in this respect. That genie was not going back into the bottle, however much conservative bankers of yesteryear might deplore it, and the real question was therefore how best to adapt to it. In this context, Bagehot’s Principle, which urged free lending against securities that would be good in normal times, can be seen not so much as a radical expansion of central bank responsibility but rather as a conservative banker’s reassertion of the central position of traditional banking in the brave new world of capital finance that was emerging. If banks know that they can always take commercial bills to the central bank for discount, maybe they will make sure to hold an adequate supply of such bills in reserve, and so avoid excessive exposure to illiquid mortgages that are not eligible for discount.

Even more, Bagehot realized that London was emerging as the center of a global trading system that extended far beyond national boundaries. That is the clear subtext of the essays collected in Universal Money (1869) and The Depreciation of Silver (1877). London’s bill market was becoming the essential infrastructure not only for Britain’s domestic trade but also for its international trade, and indeed even for the trade of third nations with each other. De facto, the Bank of England was thus emerging not only as central bank of England, but also central bank of the world. This was another genie not going back into the bottle, and again the real question was how best to adapt to it. In this context as well, we might see Bagehot’s Principle as conservative counsel, an attempt to draw a sharp distinction between assets that are eligible for discount and those that are ineligible, with the idea that subsequent management of the discount rate might prove sufficient lever to manage gold inflows and outflows, thus warding off challenges to convertibility.

These two facts, the rising importance of capital markets and the globalization of commerce, were central subjects of Bagehot’s writing for The Economist over the years. And Bagehot wrote not merely as an observer of current trends, but more importantly as an economist, working to fit the emerging new monetary and financial facts into the fabric of economic science as he knew it. Grant tells us that Bagehot had become familiar with the principle authors of English Political Economy as early as his undergraduate days at University College London (p. 32), and that he was “tapped” for membership in the Political Economy Club as early as May 1864 (p. 154), but he seems not to appreciate the importance of these biographical facts. “He was not a theorist, but a user of theories and a critic of theorists” (p. 287). This seems ungenerous to a fault.

Indeed, when Bagehot died, he was at work on a three volume treatise, the bits and pieces of which were gathered together by his friends and published posthumously as Economic Studies (1880), the first two essays of which were subsequently published separately in a special student edition The Postulates of English Political Economy (1885) with an introduction by Alfred Marshall. In these essays, even more than in his writings for The Economist, we see Bagehot writing not so much as a financial journalist but rather as a classical economist, building on Adam Smith, David Ricardo, and Robert Malthus. (He was apparently unaware of the neoclassical turn that was just then getting started in economics in the works of Jevons and Menger, soon to be consolidated in Alfred Marshall’s Principles of Economics (1890).) And he was writing as one who understands the machinery of money as the very foundation of the system of commerce that the classical economists were trying to understand, a system born in England but expanding during his lifetime across the face of the world.

A central postulate of the classical worldview, according to Bagehot, was the transferability of both labor and capital from one employment to another in search of higher return. From this point of view, so he argues, the operations of the money market are key, because those operations are the fundamental mechanism through which capital moves. Here, to my mind, is a theoretical contribution of the first order, albeit more in embryo than fully realized.

Readers of Grant will miss all of this, and not even know that they are missing it. If you can only read one additional source, my recommendation would be R.S. Sayers’ essay “Bagehot as an Economist” (1978), which treats these points and others as well, in more detail than is possible within the confines of a short review. Readers already familiar with Sayers will know that his own work quite explicitly built on foundations laid by Bagehot (as Sayers 1957), as indeed does the work of many others in the rich intellectual tradition of British central banking that stretches up to the present day. Apparently it takes one to know one.


Bagehot, Walter. 1880. Economic Studies. London: Longmans, Green.

Bagehot, Walter. 1885. The Postulates of English Political Economy. London: Longmans, Green.

Fullarton, John. 1845. On the Regulation of Currencies. London: J. Murray.

Sayers, R. S. 1957. Central Banking after Bagehot. London: Oxford University Press.

Sayers, R. S. 1978. “Bagehot as an Economist.” Pages 27-43 in St. John-Stevas (1978, Vol. IX).

St. John-Stevas, Norman. 1978. The Collected Works of Walter Bagehot. The Economic Essays, Vol. IX-XI. London: The Economist.

Tooke, Thomas. 1844. An Inquiry into the Currency Principle. London: Longman, Brown, Greene, and Longmans.

Perry Mehrling’s MOOC on Coursera tries to do for the twenty-first century New York money market what Bagehot’s Lombard Street did for the nineteenth century London money market, namely to make its operations and its importance visible to the general public:

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