During the 2007–2009 financial crisis, Walter Bagehot’s name (pronounced “Badge-it”) crossed the lips of many central bankers, notwithstanding the fact that he had been dead for some 130 years and he was not a central banker. This relevance came from his belief that the Bank of England needed to act as a lender of last resort during a financial crisis. Former Federal Reserve chair Ben Bernanke, writing in his 2015 memoir The Courage to Act, confidently declared that the string of programs he helped to implement during the 2007–2009 crisis “prevented the financial system from seizing up and helped to keep credit flowing. Walter Bagehot would have been pleased.”

In this new biography of Bagehot, financial writer James Grant considers the role of the Bank of England and Bagehot’s broader footprint on financial policy. Grant is a prolific writer who primarily focuses on volumes tracing markets and finance from a historical perspective. His last book was The Forgotten Depression: 1921 — The Crash that Cured Itself. That book explained Grant’s narrative that the deep U.S. recession of the early 1920s was resolved largely through market forces that addressed the malinvestment of that era, in contrast to the heavy-handed government intervention that was applied during the Great Depression of the 1930s and the Great Recession of the Bernanke era.

In this book, Grant looks at a true renaissance man of the Victorian Era, that period of time in the United Kingdom dominated by the reign of Queen Victoria. The book makes clear the broad array of accomplishments Bagehot claimed during his 51 years of life.

A wonderful (conflicted) life / Bagehot’s most widely known accomplishments include that he was a banker and the author of the book Lombard Street, named after London’s counterpart to Wall Street. In that book, he set forth his views on the need for the Bank of England to provide emergency lending during a financial panic and hold the nation’s bullion reserve (so banks would not have to take on that costly burden). He was also the editor of the periodical The Economist, which was founded by his father-in-law, James Wilson.

Bagehot weighed in on many of the major issues in 19th century finance through his writings and in discussions with the technocrats and politicians of the day. What may be known by fewer people is that he also put himself in the running for Parliament on multiple occasions. Grant notes that someone taking on such a broad range of roles in the 21st century would likely be labeled as conflicted:

It was, indeed, in the multifaceted capacity of banker–lobbyist–editor–political aspirant that Bagehot visited the chancellor on March 3, 1864. Today, such an overlay of professional roles might set in motion half a dozen ethics committees, but not then.

In his 30 years of leading The Economist, Bagehot felt strongly about many issues beyond financial panics. He carried forth the mantle of Wilson on matters of trade, as Grant illustrates: “Free trade (The Economist sometimes reverentially capitalized the initial letters ‘F’ and ‘T’).” Bagehot and the pages of The Economist railed (at least since the 1850s) against those investors who, in a time of “corruptingly low interest rates,” would seek out investments in risky markets: “People who lend to States like Spain and Turkey and Egypt deserve to lose their money, and the clever people who think they will go in for a little time and get out before the crisis comes are among the most likely to lose.” In the realm of politics, Grant describes Bagehot as someone “who believed in progress, religious liberty, limited government, clean elections, non-entanglement in foreign wars, free trade, and … free banking.”

A life marked by financial crises / Bagehot was a banker and a close observer of the financial system from his perch at The Economist. Grant manages to weave through the events of Bagehot’s life, punctuating them with references to the major banking panics of his era: 1825, 1837, 1847, 1857, and 1866. The last of those panics saw the collapse of the bills, brokers, and money dealers Overend, Gurney & Co., which had a great deal of influence on how Bagehot viewed a central bank’s role in a crisis.

Although many modern-day central bankers claim Bagehot as a kindred spirit, Grant makes clear that 19th century finance was vastly different.

He was initially duped about the condition of Overend, commenting in The Economist about a restructuring of the institution:

Overend’s must have much money left with them…. The house is not weakened but strengthened by what has occurred. As to the management, there ought to be, and must be, great traditional knowledge and skill in a concern which has been so very profitable so very long.

Grant then writes of Bagehot’s optimistic outlook, “He would soon rue it.” Overend would unravel in short order:

By the time the Overend Gurney directors met in the first week of May to consider a capital call, the situation was irretrievable. Their only recourse was … the Bank of England…. The Bank dispatched a three-man team to inspect the supplicant’s books. The verdict was negative — the Corner House was insolvent — and the Bank [of England] declined to assist…. Overend Gurney closed its doors. The ensuing panic exhausted the descriptive powers of the financial press.

A life consumed with the Bank of England’s role / Bagehot will likely always be most known for his views on central bank lending. His thoughts on the matter were developed in a number of intellectual battles with the likes of Thomson Hankey, a member of Parliament and a governor of the Bank of England, and George Norman, a director at the Bank of England for 50 years. Hankey was of the view that “a good banker had no need of a central bank and a bad banker had no claim on a central bank.” As part of a lecture series he released, Hankey gave a brutal assessment:

The Economist newspaper has put forth … the most mischievous doctrine ever broached in the monetary or banking world in this country; that it is one of the proper functions of the Bank of England to keep money available at all times to supply the demands of bankers who have rendered their own assets unavailable.

Norman made similar principled arguments:

Some solvent businesses might be unable to borrow and that such deprivation could force some into bankruptcy. Well, if so, it was their own fault for sailing too close to the wind. In any case, crises soon passed. The solvent would swim — the insolvent sink — and the public at large would learn a valuable lesson.

These discussions “nudged the editor of The Economist in the fruitful direction of Lombard Street — that seminal description of the workings of Victorian finance.” Given his role as a banker, Grant calls Bagehot an “interested party” on matters of the role of the Bank of England. Bagehot’s own bank, Stuckey’s Banking Company, was not a likely recipient of lending during a crisis: “Stuckey’s seemed crisis-proof. It sailed regally through the Panic of 1857, the American Civil War and the occasional poor West Country Harvest.” But if the Bank of England did not play the role supporting Lombard Street, Stuckey’s “would earn a great deal less if the monetary rules required it to stockpile its share of non-interest bearing cash that the Bank of England now husbanded for the banking community as a whole.”

In his Author’s Note, Grant’s admiration for Bagehot is on full display for the sheer volume of his work: “His output astounded me — 5,000 words a week at least, and each word placed just where it should be. Was such a thing possible?” But in the same breath Grant excoriates Bagehot for the weak intellectual support he provides for his notions of central bank lending and reserves:

His embrace of the dubious notion, so corrosive to financial prudence, that the central bank has a special obligation to the citizens who present themselves as borrowers and lenders, investors and speculators. No other class of person enjoys access to the government’s money machinery.

But much of Grant’s harshest scorn is reserved for today’s central bankers. Does he think the Fed and other central banks have bastardized Bagehot’s dictum in its crisis response? The answer clearly is yes:

Because Bagehot’s words are so easily quoted, they are often misquoted. His prescription that, in a panic, a central bank should lend freely at a high rate of interest against good collateral has virtually become, following 2007, “Lend freely at low rates of interest while materializing immense sums of fiat money with which to raise the prices of financial assets in order to stimulate spending by the people who own the assets.”

Although many modern-day central bankers claim Bagehot as a kindred spirit, Grant makes clear that the world of 19th century finance was vastly different. Bagehot believed that “money was gold and silver and that alone…. [Bagehot] never changed his publicly expressed view about [the importance of] the gold standard or the abomination of fiat currency.” In so doing, Grant openly questions the intellectual honesty of those modern central bankers who pick and choose the writings of Bagehot that they happen to agree with, rather than taking a more holistic view of his philosophy on all matters finance.

Bagehot is a great read, supported by Grant’s usual painstaking historical research. That said, I would have preferred a volume narrowly focused on Bagehot’s views on the role of central banks. Some questions remain in my mind on that issue. But that is not the book Grant chose to write and I will defer to his judgment.