Sunday, April 5, 2020

"Bagehot: The Life and Times of the Greatest Victorian"

Sydney M. Williams

Burrowing into Books
“Bagehot,” James Grant
April 5, 2020

The source of every speculative mania, besides corruptingly
 low interest rates, is the drive to do too much with too little.”
                                                                        James Grant (1946-)
                                                                        Bagehot: The Life and Times of the Greatest Victorian, 2019

James Grant, publisher of “Grant’s Interest Rate Observer,” is the author of a dozen or more books, including The Forgotten Depression: 1922, the Crash that Cured Itself and John Adams: Party of One.
In this he offers a primer on Victorian economic history, as well as the fascinating tale of Walter Bagehot and his views that are reflected today in “Bagehot’s Notebook,” a regular column in The Economist, an analysis of British life in politics, in the manner of Bagehot who served as editor from 1861-1877.

Walter Bagehot (“pronounced Badge-it”) was born in 1826, in Langport, Somerset County, 130 miles west of London. He died in London in 1877. His birth came a year after the first rail line was built in England, a thirty-mile section between Liverpool and Manchester. As machines, driven by water, steam and coal replaced manual labor, standards of living rose. Wealth grew and industry expanded, requiring a more urgent need for banking. His father was with Stuckey’s Banking Company, the bank the younger Bagehot joined in 1853, eventually rising, like his father, to vice-chairman. Being a banker did not deter his interest in writing and journalism, in fact it made him a more astute observer. In 1855, he co-founded National Review. Most significantly, in 1858 he married Eliza Wilson, daughter of James Wilson, founder of The Economist, the magazine where Bagehot made his name.

The 19th Century was the first “global” century and was a prosperous period for Britain; though financial panics occurred about every ten years. Upheavals in other parts of the world had their effects: The revolutions of 1848, which struck France, Italy, German and Austria; the Crimean War of 1853-1856, a last gasp for the Ottoman Empire; the American Civil of 1861-1865, and the Franco-Prussian War that saw the unification of Germany. Bagehot was not always on the right side of these issues; for example, he supported, as did many in Britain, the South during the American Civil War. “Bagehot was a superior commentator, though a middling seer…,” writes Mr. Grant. Being wrong did not bother commentators like Bagehot. “…mea culpa was no part of the repertoire of Victorian financial commentators, including Bagehot.” Mr. Grant takes us through the 1847 panic, caused by railroad speculation; the panic of 1857, driven by unsound American banking practices, and the over extension of credit that led to the collapse of the merchant bank Overend, Gurney & Co. in 1866

We are introduced to domestic issues, with most of the later ones subjected to Mr. Bagehot’s pen: the Reform Act of 1832, the repeal of the Corn Laws in 1846, Women’s Suffrage movement, Disestablishment of the Irish Protestant Church, the Reform Act of 1867, and the debate over the Bank of England as lender of last resort, a move favored by Bagehot. We meet contemporaries that Bagehot knew, like the two leading politicians of the era, the conservative Prime Minister Benjamin Disraeli whom he loathed and the liberal PM William Gladstone whom he admired; John Stuart Mill, the classically liberal economist, philosopher and Member of Parliament who argued for women’s rights; authors George Eliot and Anthony Trollope, and the suffragette Emily Davies. “Among his self-limited circle of friends,” Grant writes, so as not to give the wrong impression, “Bagehot made room for Tories as well as Liberals.”

Walter Bagehot knew influential people, but it was as writer and editor of The Economist from which his fame grew. He wrote that “short views and clear sentences” were imperative, a forerunner of E.B. White and a new thing in English letters. However, at times he violated his precepts. He preached prudence in banking, matching assets against liabilities, both in quality and duration, and he favored limited liability companies, as they would admit a new class of investors into British capitalism. He favored a gold-backed currency and a central bank that would be a lender of last resort. However, “his prescription,” as Grant writes, “that in a time of panic, a central bank should lend freely at high rate of interest against good collateral,” has been ignored. Since 2007, the new prescription is to “lend freely at low interest while materializing immense sums of fiat money.” The purpose: to increase asset prices in the hopes of stimulating spending. Would Bagehot have approved? James Grant thinks not.

Bagehot wrote in a time of different norms: The gold standard, balanced budgets and fixed exchange rates. As well, shareholders were responsible for the solvency of the banks in which they were invested. He lived when a small number of elites made decisions that affected large numbers of people. From our perspective, he was a snob. In his collected works, Bagehot is quoted: [the] “lower orders, the middle orders, are still, when tried by what is the standard of the educated ‘ten thousand,’ narrow-minded, unintelligent, incurious.”  It was not until 1880 that attendance at elementary schools was made compulsory for children ages five to ten. In 1873, The Economist had only 3,690 paid subscribers. Grant notes: “There was nothing of the mass market about Walter Bagehot.”

Above all, because of his experience in the real world of banking and commerce, Walter Bagehot was a proponent of “Institutionalized discipline.” He believed in sound banking principles. He was an advocate for personal responsibility and accountability. With interest rates close to zero, fiat currencies, central banks printing money, and a culture of “too big to fail,” the world could use the common sense of a Walter Bagehot. He was not without flaws, but those one could attribute to the age in which he lived. In offering this life of Walter Bagehot, James Grant has done a service to those interested in the economic history of 19th Century Britain, as well as those concerned about the monetary volcano on which we now sit.

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