Saturday, July 5, 2014

Bagehot, 1878, Lombard Street: a description of the money market (political economy)

Bagehot was a journalist known as the founding editor of the Economist, but also a political scholar who studied the British constitution, and by no means an unmitigated enthusiast for markets.  Here he emphasizes the importance of judgment and minimalism in regulation, while retaining the dominant role of state institutions (like the central bank) in reserve.  Ultimately, it is the power of the state that creates markets, and they exist only because of the rules imposed by the state, but this does not prevent them from doing their utmost to circumvent the rules to maximize gain. He called the book “Lombard Street” in order to emphasize the concrete descriptive reality of the way that markets worked, rather than abstract theory popular in economic circles. The book describes the emergence of the companies that dominated London’s Lombard Street in the 1870s, the role of the Chancellor of the Exchequer (i.e. the political-economic interface in practical terms), the process of arbitrage (Chapter V: “The mode in which the value of money is settled in Lombard Street”), the role of emotions in the value of money (why it is often dull and sometimes very excited!), the role of the central bank (here he is generally a fan), the governance of the Bank of England, special banks for stock, and private banks and stock brokers.  His final chapter is reserved for an opinion piece about the principles governing the extent of reserves by the Bank of England, on which he is generally what Cornford would have described as a Liberal Conservative.  A model of clarity, this is now a historical curiosity, given the changes that the market mechanisms have seen since the 1870s, but it's surprising how often it shows up in footnotes by political economists of the British school.  

Bagehot, Walter. (1878) Lombard Street: a description of the money market. C. Kegan Paul. [Oc-e] Rff Niall Ferguson (2013)

David Last, 20 June 2013

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