Money, being gold, had to be held by someone. You'd expect that it would not be so bad to own a chest full of gold, except that gold (then as now) bore no interest. It was sterile. Money is, I guess, defined as a sterile thing. The dollar bills in your wallet don't pay you interest, either. In Bagehot's day, one of the great controversies had to do with who had to hold that gold. It could be the banks themselves, because a bank was required to exchange currency for bullion at the request of the customer. Banks wanted to hold as little of it as they could possibly get away with. They wanted the Bank of England to bear the cost they preferred not to.
Fast-forward to the present day: who should bear the cost of making good when big commercial banks run off the road and into the ditch? Should it be the stockholders of those banks, or should it be the taxpayer? In Bagehot's day, it was the stockholders themselves or the banks who bore the cost of failure. Nowadays, it's the taxpayers who, in some of the most dramatic cases, bear that cost. The answers to the questions posed to the citizens of each era are different. The questions are certainly familiar, if not identical.
OR: What was Bagehot like as a writer? Can you talk about his book Lombard Street?
Grant: Bagehot was a man of terrific intellectual versatility. His prose was nothing short of sublime, in my opinion. I commend any doubters to go online or even to the library and read his essays on, for example, Adam Smith, John Milton, or Shakespeare. Bagehot had a hobby and his hobby was literature. He delighted in reading and writing about what he had read. One portion of his journals has to do with literary criticism. He was an amateur in the full flower of Victorian amateurism, whether it was in politics or central banking or in cricket. Amateurs ruled the roost and such was the state of human knowledge that you could become an authority on an academic discipline or sub-discipline while holding down a day job. Bagehot associated with people who were amateur archeologists and amateur classicists. It was a very stimulating environment.
The work you mentioned was the only book he wrote that was not first serialized. It was 73,000 words, very concise, and it had to do with the controversies that I previously mentioned about whether the central bank ought to hold the gold reserve — and the even more fraught and (to this day) very timely question about the duty of a central bank in a time of monetary tumult and crisis. Should it stand there allowing nature to take its course or should it stand ready to intervene in the interest of stability?
Bagehot took the latter side. He was all in favor of what he regarded as constructive central bank intervention at times of crisis, and he prescribed that the central bank should lend freely against good banking collateral at a suitably high rate of interest to discourage unnecessary access to the bank's accommodation. Ben Bernanke, when he was writing his memoir The Courage to Act, cited Bagehot's name in the index more frequently than that of any living economist. Bernanke and his successors at the Fed have made a somewhat selective adaptation of Bagehot's program. They're all in favor of lending freely. They do not pay so much attention to the parts about good banking collateral or a high rate of interest. They are for lending freely at, if necessary, zero percent. (Less than zero, sometimes.)
OR: You describe Stuckey’s bank as existing within a social mesh that served more or less as a regulator. Can you talk about the different regulatory atmosphere in Bagehot's time?
Grant: Let's start with the present day. If you walk into the lobby of Citicorp, for example, or Goldman Sachs, or J.P. Morgan, you can't be sure who is working for the government and who among the throngs of people is on the payroll of the institution itself. You don’t know who is doing the banking and who is doing the oversight, because the regulators actually go to work in the morning in the banks. They have offices at the “too big to fail” institutions. It's like the Marine Corps having a detachment at a United States embassy. The regulators' physical presence on the premises of today's banks speaks to the intimate relationship between government and banking.
There was nothing like that in Bagehot's day. I don't think Stuckey's had anything to do with the government at all. It was not one for availing itself of the accommodation that the Bank of England offered. Stuckey's was not inspected by the government or audited by the government. It was audited by its own auditors — by itself. The regulatory regime had to do with responsibility of the owners of these banks in Bagehot's day for their solvency.
If a bank became impaired or insolvent, it was the stockholders who got the summons to stump up more capital. There were two forms of organization. One was a general partnership. Under a general partnership, the general partners themselves were liable, as they used to say, down to their last shilling and acre for debts to the firm. In a crisis, you find that the owners of shares in a bank like Stuckey's would be very, very uneasy, because if the bank failed, they would be on the hook for the losses.
Stuckey's was one of the finest banks in the realm. It earned 40 percent on its owners' equity, on the stockholder's funds. It was most extraordinarily profitable. Today, in contrast, a good bank makes 12 or 15 percent, sometimes 10. Stuckey's was the epitome, the avatar of the successful Victorian bank. It had a group of stockholders who were solid citizens and whose personal wealth the depositors knew would be more than sufficient to compensate them in case the bank itself got into trouble. There would be a capital call and the substantial stockholders of Stuckey's would themselves be able to compensate any depositor for any loss. It was a regime of trust, not of state guarantee.
