goes on growing, multiplying, and changing, as the English people itself goes on growing, multiplying, and changing. The facts of it are one thing today and another tomorrow.’46 ‘England has become the settling place of international bargains much more than it was before’, he observed. ‘But whose mind could divine the effect of such a change as this, except it had a professed science to help it?’ A new wave of investment in ‘half-finished’ and ‘half-civilised communities’ flowed abroad. ‘Who can tell without instruction what is likely to be the effect of the new loans of England to foreign nations?’ Such easy access to credit, and on a global scale, was unprecedented in human history. It fell to Bagehot’s Economist to map this new world, tracing the theoretical insights of political economy to the people and places men of business were sending their money.47
Central Banking Rules
It was in the halfway-house between theory and practice that Bagehot made his contributions to financial history, where the legacy of his editorship was the construction of a role and set of rules for central banking in the age of global capital. On these matters, his opinion carried great weight. Gladstone dubbed him a ‘supplementary Chancellor of the Exchequer’ and consulted him on policies such as the Bank Notes Issue Bill, with Bagehot promising ‘the entire assent and substantial support of the issuing bankers’.48 Contemporaries credited him with inventing the Treasury Bill in 1877, when he advised Gladstone’s successor as Chancellor, Sir Stafford Northcote, to replace ‘Exchequer Bills’ with a modern, easily traded instrument, to ‘resemble as near as possible a Bill of Exchange’. ‘The Treasury has the finest security in the world, but has not known how to use it’, Bagehot explained privately. ‘Such a Bill would rank before a Bill of Barings.’49
The Economist was the source of this authority as well as the most important outlet for his views on bringing stability to the financial system – which by all accounts needed more of it: crises were frequent, either beginning in the City of London or passing through it infinitely magnified, as the spoke around which international finance now turned. At home, the panic of 1866 was among the most spectacular, dominating Economist coverage of the money market long afterwards. In that year one of the City’s great wholesale banking houses, Overend, Gurney & Co., failed soon after it had raised large sums by incorporating as a company with limited liability. After the stock market crashed, a bank run ensued. For Bagehot, the episode demonstrated beyond a doubt that the Bank of England, which at first refused to intervene, was unlike all other banks and discount houses, and Bagehot told Gladstone as much during the crisis, over breakfast on 31 May.50
Bagehot also developed this argument in countless Economist leaders, distilled into a standalone book in 1873, Lombard Street. Since it was backed by government and held the nation’s reserves, the Bank of England had an important duty. When credit dried up during a crisis like the one that felled Overend, Gurney & Co., it must act as lender of last resort, until confidence returned, using two guiding rules: advances must be at a ‘very high rate of interest’ and made on ‘all good banking securities’, thereby limiting the bailout pool to ‘solvent’ but ‘illiquid’ banks, and encouraging rapid repayment.51 The Bank of England’s directors were ‘trustees of the public’, whose actions had a major effect in and beyond Britain. ‘A large deposit of foreign money in London is now necessary for the business of the world.’ Yet this also meant that a rush to withdraw by foreign individuals, businesses or states could determine ‘whether England shall be solvent or insolvent’.52 The Bank of England would require larger reserves in the light of the vast new scale of British financial commitments and could no longer be governed by an elderly bench of part-timers, drawn from a class of reputable but amateur City merchants.53
The French answer was nationalization. That, obviously, would not pass muster with the English. Such a move also had the demerit of exposing government to criticism in a crisis, or subjecting policy to political pressure, ‘as chance majorities and the strength of parties decide’.54 In an ideal world, he conceded in Lombard Street – with a nervous glance over his shoulder at Wilson – the Bank of England would not even exist. Like any other trade, state meddling harmed the banking business. ‘The best thing undeniably that a Government can do with the Money Market is to let it take care of itself.’ Since it did exist, though, better not to upset markets by any too-radical change. ‘You might as well, or better, try to alter the English monarchy and substitute a republic’, he added archly. Yet the analogy between the function of credit and that of a constitutional monarch was deliberate – and revealing. Bankers had faith in the Bank of England as implicitly as ‘Queen Victoria was obeyed by millions of human beings’.55 There was no good reason to accept either, in other words.
But since people did believe, and their belief was essential to the smooth running of the banking and political systems, Bagehot looked to the monarch as a model. The appointment of a permanent deputy director to the Bank with the requisite experience, sitting under a rotating, ceremonial governor, would ensure consistency and independence enough to instil confidence in the nation’s credit. But where to find the deputy? The custom by which bankers were excluded from the Bank’s governing body dated from an era in which all banks, including the Bank of England, were in competition. ‘This is a relic of old times.’56 Now bankers could work together, and as the principal depositors, with an interest in a large reserve to safeguard their assets, they were ideal candidates.57 The point was to remove the old commercial oligarchs from the board of the central bank as well as any threat of parliamentary interference. Major powers – to set interest rates, determine and maintain adequate reserves, and to bail one another out in a pinch – would fall to the bankers themselves.
For Bagehot, banking was the mirror image of politics. Both depended, in the final instance, on a powerful illusion from which everyone benefited – even if only a discerning few were able to chuckle about it. In his lifetime better known as a banker (Lombard Street took just three years to reach a sixth edition), Bagehot is more widely read today for what he had to say about the other side of this looking-glass. His writings on the English Constitution represent just a small sample of his political output, however. The Economist took him further afield, towards two political systems that contrasted with Britain: Louis-Napoléon’s imperial dictatorship in France, and the partisan democracy in America. By the 1870s both France and the US were just beginning to challenge the monopoly Britain had enjoyed over industrial production for the world market, while entirely new nation-states appeared alongside them, in Germany and Italy, whose leaders sought to unleash the productive forces latent in their own societies. The Economist cheered these developments, which would require ample investment capital to be realized. But it also identified a new problem, thanks to Bagehot, on which its comparative political judgments of them hinged. In an age where new and older nation-states were attempting to play catch-up to Britain, in part with British capital, the role of political institutions in fostering this growth – or hindering it – became pivotal; and for Economist readers, a way of evaluating the potential return on their investment, and its security. Historians have noted how this wave of capital transformed the world economy – pushing frontiers of food cultivation in North America and Eastern Europe, cotton production in India, mineral extraction in Australia, ranching in Argentina, and railways nearly everywhere, cheapening the transport cost of all these goods.58 Fewer have remarked on the form of liberal politics that was its corollary, and which had no clearer tribune than Bagehot’s Economist.
Confidence Tricks: The English Constitution and the Dangers of Democracy
On its own the English Constitution, first released as a book in 1867, ensures that Bagehot is required reading for any soul bold enough to inquire into the arrangements by which Britain persists in being governed. In it, he presents an alternative view of the parliamentary system, in which it is divided into two parts, as opposed to three, and the traditional theory of checks and balances between them is discarded. There are the dignified parts, ‘which excite and preserve the
