Dailyspecs may be interested in reading "The Sage of Equipose," a review on p C7 of the weekend WSJ of Frank Prochaska's The Memoirs of Walter Bagehot. Bagehot was the longtime editor of The Economist. The book consists mostly of Bagehot's own writings.

Fed critics will enjoy Bagehot's "Lombard Street" passage in which he "traced British financial instability to the Bank of England's special privileges, which, by restricting other banks' ability to issue circulating notes, caused them to employ Bank of England notes rather than gold as their cash-reserve medium."

Stefan Jovanovich elaborates:

Bagehot was — like all successful financial journalists — always loyal to authority and convention while seeking, whenever necessary, changes in the name of progress and the general welfare. Magically, those "reforms" invariably end up benefitting the people holding the largest sums of money– usually, but not always, the banks.

I don't fault Bagehot for any of this; it is the financial journalist's job. My difficulty is with what he had to say.

Bagehot was a supporter of the gold standard only in the sense that he did not want banks to be completely free to issue notes without some fractional reserve being held against those IOUs. One can say as much for Keynes; at Bretton Woods he did not propose that the world central banks to be completely free to issue script. Both men thought that currencies needed to have some connection to gold; but neither thought it was, in any way, a good thing to have ordinary people able to demand specie for their measly savings and then "hoard" it in hard times.

Bagehot's essay on Universal Money is a fascinating reminder of just how much snobbery underlay all modern discussions about currency "reform". Bagehot is horrified at the French and Americans for wanting a "low" gold standard - i.e. one that puts an ordinary laborer's wages within the reach of actual coin.

Bagehot was equally horrified by the Americans' notion that there should be not central bank at all. People have been taught to read Lombard Street as a prescription for somehow limiting the printing of money; but it is really a tract in favor of allowing banks to call upon the BofE for notes in a crisis without any restriction at all in the amount that the BofE itself can print or how much debt the government can sell to the central bank.


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