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James Grant on Walter Bagehot and The Economist

Octavian Report: Why a book about Walter Bagehot? Why now? Why is he, as the subtitle calls him, “the greatest Victorian”?

James Grant: Why Bagehot? Because he was one of the very few people of genius who ever practiced the somewhat humdrum craft of writing about financial markets. Financial journalism is among the humblest branches of journalism, and here was the incongruity of a man of considerable talent — indeed, I would say a genius — taking up that craft. That’s nice to know: that someone in history did what one does today but did it ever so well. That was the reason for my interest in Bagehot. I, years ago, would go to the public library on 42nd Street and take out the bound volumes of The Economist during the years that Bagehot was running the place and would read his copy just for the sheer joy of the prose. He’d write 5,000 or 6,000 words a week. Every word placed where it ought to have been. It was a delight then, and still is a delight.

Why now? Because the conflicts, the successes, and the failures of finance in his day are still very much with us. Different institutional setting, different monetary structures, but the same human personalities at work. In Bagehot’s time there was conflict over the question of what we now call moral hazard: who wears the loss in a time of financial upheaval? Is it the individuals who put their money at risk? Or is it the taxpayers? That is, perhaps, a question as old as the invention of financial markets. It was timely in Bagehot’s day. Certainly it’s as timely, and perhaps more timely, today.

As for his being the greatest Victorian, that laurel was placed on his head not by me but by a truly great historian, G.M. Young. “We are looking,” writes Young, “for a man who was in and of his age, and who could have been of no other. A man with sympathy to share and with genius to judge its sentiments and movements: a man not too illustrious or too consummate to be companionable, but one, nevertheless, whose ideas took root and are still bearing; whose influence, passing from one fit mind to another, could transmit, and can still impart the most precious element in Victorian civilization, its robust and masculine sanity. Such a man there was and I award the place to Walter Bagehot.”

OR: What were the truly contentious politico-economic issues on the boil as Bagehot was embarking upon his career?

Grant: One was: what’s money and who says so? Should the liabilities or the promises to pay of independent profit-making banks be money, or should money be defined entirely as gold and silver? That was one question. One of the great questions of the age is encapsulated in a single word, Reform: who gets to vote? Should it be only property holders of a certain amount with a certain amount of income or should it be most everybody? Should women vote, as John Stuart Mill shockingly suggested?

Another question was religious inclusion. One of William Gladstone’s early works was a tract arguing that only communicating members of the Church of England, that is to say members of the Church who took communion, should be eligible to hold office in the British government. Bagehot confronted this himself, as his father was a Unitarian. Bagehot was more or less a Church of England man. I say more or less because it wasn’t quite clear what he believed. But he was prohibited by his father from applying to Oxford or Cambridge because those schools had religious tests. You had to sign off on the 39 articles of faith of the Church of England in order to be eligible to be admitted.

OR: What are Bagehot’s views as a young man and how do they change, if they do change, over his career?

Grant: Bagehot was an establishmentarian. He was of his age, as the quote from Young underscores. He was very much against the enthusiasms of the age, including the radical views of Karl Marx. I’m not sure if he ever engaged with Marx or his ideas by name. But he certainly would have not accepted them as valid. He was the son-in-law of James Wilson, one of the champions of free trade. Bagehot too, certainly as editor of The Economist, was all for free trade.

He was not for the leveling of society. He was not for the inclusion of all in the body politic. He was for gold and silver. They alone were money in Bagehot’s view. Every banknote, whether it was from the Bank of England or whether it was from his own family bank, Stuckey’s, were debt obligations. They were notes. A note is promise to pay what? A promise to pay money. Money being only gold and silver. Bagehot was a very much in the mainstream of the orthodoxy of the religion of the Victorian age. I’m not sure his views on money did change. I think he came to accept rather grudgingly the move towards the widening of the franchise. He was not one for fighting for lost causes. He was one for getting along.

OR: Why does there seem to be an eternal recurrence of the same in arguments about topics in economics — be it moral hazard, new technology, or anything else?

Grant: I would say that the cause of the recurrence of a familiar economic argument is owing to the persistence of us humans as inhabitants of this planet. Human nature changes little. The circumstances of people in the business of making a living or engaging with a state — those circumstances are certainly a little bit changed, because the structures of our politics change and the structures of our monetary affairs change. But when you get down to the root of things, they are very little changed over time. For example, the gold standard is a very different thing than the current regime, which we at Grant’s call a “Ph.D. standard:” discretionary monetary management by former tenured economics faculty. The gold standard is objective and has to do with the definition of money as a weight of gold bullion; the Ph.D. standard is more or less subjective. Money under the Ph.D. standard is undefined and can be dematerialized as easily as you can hit a computer keystroke. You would say that there could not be two more dissimilar monetary systems — except that in Bagehot’s day, there was a great controversy over who should bear the cost of holding the national gold reserve.

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.

OR: What role did and do The Economist and financial journalism more generally play in the information ecology of the markets?

Grant: The Economist was in the forefront of an informative journalism, of honest journalism. Bagehot, without bragging, remarked that The Economist alone to his knowledge was above taking a bribe to run a story. The good old days were not so good with respect to the quantity and quality of information available to investors.

There was a famous crackup in Victorian times. It involved a firm of great eminence called Overend, Gurney. Overend, Gurney was kind of a combination of Goldman Sachs and J.P. Morgan way back when. It was a bill broker. It lent against the collateral of commercial IOU’s. People thought the world of it.

In the 1860’s, it became corrupted through some very bad actors; the bad actors took over part of the bank and ran it into the ground. To reclaim their financial position, Overend, Gurney went public. Their prospectus comprised five paragraphs. That was it. That was the sum total of information you could get. It was highly qualitative as well. Not very many figures. Bagehot reviewed this and he was mealymouthed about it. He said, “Well, these are very good people, and you wish them the best, but there are some questions.” Wouldn’t you know it: once the public was in, the public was bagged. Overend, Gurney failed and there was a great panic. The Economist was in the forefront. It was by no means perfect. But it developed a statistical section before others did. It was a great contributor to the efficiency and to the intelligence of financial markets. Bagehot was also a close and cynical and very observant critic of the wave of what we would now call emerging-market financing that took place in London in the 1860’s and 1870’s. That was one of his great triumphs as a financial editor.

Without information, financial markets are rather in the dark. I think one of the big problems today — a great risk — is central bankers running this all-but-declared campaign against price discovery and the setting of interest rates in the open market. They have controlled these multi-critical prices. They’ve driven them lower and lower, and to the extent that interest rates are deformed or corrupted, we investors and observers of markets live in kind of a hall of mirrors. We don’t know exactly what’s real and what’s not real. We have a lot more information today, but we also have a very Buttinsky school of central banking that is making nonsense out of the objective information available to us.

OR: How would you define Bagehot’s legacy and where on balance would you say he was right and he was wrong?

Grant: Toward the end of his life, he was tapped for membership in the Athenaeum Club, the Valhalla for English intellectuals of the age. The criteria for election was eminence in science, literature, the arts, or public services. Bagehot playfully asked his wife, Eliza, “I wonder what my eminence is?” His eminence, as I conclude, was the near literature of high journalism. As I wrote: “Financial journalism is not so high, nor success, when achieved, so lofty. In that quotidian branch of the writing business, Bagehot was a superior commentator though a middling seer — as every financial writer must at least squint into the future. His attitude was perhaps too cautionary in the short-term, much too complacent for the long-term. He worried too much about the single gold reserve and not enough about the distant adverse consequences of government control in banking and credit.” I think his legacy for those of us practicing this very quotidian and humble craft of financial writing is that of a shining beacon of clarity and elegance.

There was a joke going around when I was breaking into the business years ago that the two major words you had to know in writing about financial markets were “up” and “down.”

Bagehot showed there were so many more words you could mobilize in the service of analyzing and describing financial events. He was my hero.

When you write a biography, you’re taking a stranger into your house for years on end. It’s important for your own enjoyment of the project that you and the subject become friends, and if you have a falling out, you get back together. Bagehot made that difficult sometimes because he had a great love of paradox and an arch tone and he was a bit of a snob. He could use such terms as “the inferior people” and “the starvable classes;” “the lower orders” and “the ruinable person.” So Bagehot was a sometimes difficult person to hang out with and have a beer, as one must if that person is in your house and not leaving for the weekend. Bagehot was not the most companionable of people, but he was a hero professionally then and he so remains to this day.

OR: Is it time for a Bagehot renaissance?

Grant: Bagehot once said, I think, something to effect that most of us live and die and are forgotten. There simply isn’t enough brain capacity to remember everyone. It’s natural that we have our moment and then we drift away and we sadly, inevitably are lost to collective memory.

I do think Bagehot deserves a bit of a renaissance, first of all, because his writing is on its own merits so enjoyable — quite apart from the relevance of his idea in the present day. And it is all the more valuable as we now confront the consequences of 10 years of monetary improvisation of a kind that would have been utterly unimaginable even to people living shortly after French Revolution and its depredations via inflation (and indeed our own revolution). The idea of QE and zero percent funding rates and $13 trillion worth of bonds issued worldwide with a yield less than nothing would, even to such people, have been beyond imagining.

These features of our present day monetary regime would have astonished anyone who lived in Bagehot’s time, and I think for those of us who are trying to come to terms with them, it’s really helpful to have a sense of what preceded today. If you only know about what’s happened since 2008 — and there are many people on Wall Street who only know that, having gone to work there eleven years ago at, say, the age of 25 — you’ve had a big chunk of a Wall Street career without seeing anything except what had never come before. What the life of Bagehot can do is to give you a sense of perspective — whether or not these experiments are enlightened and constructive, as some people say, or are destined to be very, very destructive, which is what I think. However it turns out, you can’t judge the present day without the perspective of what was orthodox in the days gone by.