I wish I could find somebody writing about money today with his skill as a writer, his knowledge (before becoming a journalist he had worked as a banker) and his scrupulous avoidance of economic dogma. He was one of those uncommon writers who are able to express complexity clearly. I think it demonstrates his astuteness that he was arguing this in 1871 two years before 'The Panic of 1873' that triggered the 'Long Depression', the first global depression, lasting twenty years. The latter part of the book points out weaknesses in the then current workings of the money market that resulted from London having become an international centre for capital and it proposes methods of safe guarding against a panic. Although conditions have changed greatly since he wrote, the book presents a good introduction to the mechanisms of capital. The fact he named the book after the specific street where the activities took place is indicative.

(I suspect the telegraph played a role in this transformation.) Bagehot confined himself to describing the workings of the actual money market, intentionally keeping clear of economic theory. This little book, published in 1871, describes the functioning of the first great capital market at the time when money first began to flow quickly and easily across distances and borders to wherever it would be most profitable to those who controlled it. Bagehot would warn us of plenty of consequences, all unpleasant the trigger will revolve around the word ‘confidence.’ I think it fair to say the word ‘prudent’ can no longer be combined with the words ‘central bank,’ at least with respect to the largest economies. It’s an ugly picture for sure with the masters of the Dollar, Yen, Euro and lesser currencies conspiring to lower interest rates and create financing schemes, without destroying confidence in their fiat money, all with the objective of maximizing employment and economic vibrancy.

Bagehot’s cautions merit repetition, times have changed the world moved away from the gold standard to paper currencies that now function in constant competition. This work can be summarized with three concepts: (1) banks should always carry sufficient reserves, (2) the central bank – in this case the Bank of England – should loan against “all good banking securities, and as largely as the public ask for them,” and (3) a sufficiently high rate of interest should be charged against loans to “operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it.” Lombard Street is an early call for prudent national banking policies, especially regarding the provision of liquidity during a financial panic.

Lombard street bagehot