Spend some time with masters of finance over a few glasses of whiskey and you may detect a curious streak of mysticism running through these apostles of the empirical, these obsessive quantifiers. Often they stray into metaphor when explaining cold calculation; they may speak of the market in terms of the currents of history or the spirits of the vasty deep. They’re fully aware that finance is tied up with intangible, mysterious elements that can scarcely survive scrutiny. The U.S. dollar, the basis of the world economy, was once backed by gold. Today it is backed by . . . nothing. A bank like Lehman Brothers can be a pillar of the community today, then collapse overnight. Bankers listen eagerly to the music of the spheres.
Yet few bankers are men of letters, hence few are equipped to sing to us of the twilight zone of the inscrutable. Here it is useful to consider the multiplier effect of two seemingly unrelated talents. Walter Bagehot was not the most revered banker who ever lived, and he was not the most revered essayist who ever lived. But among bankers, he was an unusually gifted essayist, and among essayists he had an unusual knowledge of banking.
And so Bagehot (pronounced Badge-it) continues to exert a powerful hold over that select group that is drawn both to finance and letters. A member of that club, perhaps its honorary chairman, is James Grant, who provides an abundance of both droll wit and probing financial analysis in his delightful newsletter Grant’s Interest Rate Observer. You would not be far off the mark to describe him as a Bagehot of the hedge-fund era, and so it is unsurprising that it is Grant who has given us Bagehot: The Life and Times of the Greatest Victorian.
Born into a banking family in Somerset, and later a manager of the regional bank Stuckey’s, the young Bagehot wrote with great fervor and insight about Milton and Shakespeare. He made the early acquaintance of one James Wilson, a zealot for free trade and member of Parliament in the mid 19th century who built a specialized newspaper around his advocacy for laissez-faire policy and dubbed it “The Economist.” A successor editor, Richard Holt Hutton, began to take this statistics-centered periodical in a literary direction with disquisitions on art and culture, so it aligned beautifully with the sensibility of Bagehot, who after marrying Wilson’s oldest daughter, Eliza, found himself running the magazine when Wilson died unexpectedly of dysentery while in India. Bagehot was 34. His name continues to appear in that “newspaper” (i.e., magazine) weekly, his spirit today guiding the pen of the Bagehot column’s current author, Adrian Woolridge.
Writing unsigned pieces for The Economist, Bagehot built the enduring model for that esteemed and haughty journal’s distinctive tone — not merely supercilious but super supercilious. Often wrong, he was never in doubt, and not on merely trivial matters. Backing the wrong side on the quarrel we call the Civil War, he wrote in 1862 that the Confederacy had become a full-fledged nation, so “there is not the slightest prospect of their subjugation or forcible re-annexation . . . they can earn, if they have not yet fully earned, the right to be admitted into the society of the world as a substantive and sovereign State.” Not the slightest prospect, Walter?
On the matter of Overend Gurney, the Lehman Brothers of its day, he said as it headed for the shoals that crisis had “not weakened but strengthened” it. When it crashed in 1866, he chastised readers that if only they had read between the lines, they would have heard his exquisitely subtle warning cries: “Of course we could not say what we then believed . . . that the old firm had by most reckless management reduced one of the most profitable concerns in England to one of the most losing concerns,” he wrote. “We expressed ourselves with guarded caution, and under the circumstances this is all which we could do.” He delighted in clever paradox but undermined his own coherence in the process. And like many bankers who succeeded him, he touted the wisdom of free markets even as he insisted that government should provide a backstop to endangered banks. Laissez-faire and aidez-nous coexisted serenely in his writing. Such was Bagehot’s prodigious learning and his swashbuckling writing style that he could be forgiven many an error. In person, he was even more impressive. “Is it going too far,” asked one acquaintance upon his too-early death at 51, “to say that he was the most interesting man in London to talk to?”
Bagehot was not the greatest Victorian (a sobriquet bestowed on him in 1937 by a writer for The Spectator that is not actually seconded by Grant), but he was a trusted adviser to key figures such as four-time prime minister William Gladstone, leader of the Liberal Party (under whose aegis Bagehot three times ran unsuccessfully for Parliament). His biographer rates him “the keenest political, social, and financial observer of his day” based on his essays and three books: Physics and Politics (1872), an anthropological inquiry into how national character is formed; The English Constitution (1867), about that famously intangible body of emergent law; and his “monetary masterpiece” Lombard Street (1873), a reflection on how to react to financial panics that Grant, like Bagehot a defender of the gold standard and a fierce restrictionist when it comes to interest rates, finds particularly prescient. Bagehot thought that central banks should lend money to private concerns in critical moments — “they must lend to merchants, to minor bankers, to ‘this man and that man,’ whenever the security is good” but only against good collateral and at high interest rates. Ben Bernanke, in his memoir The Courage to Act, cited Bagehot more times than any economist alive. At his most prescient, Bagehot wrote:
The good times, too, of high prices almost always engender much fraud. All people are most credulous when they are most happy; and when much money has just been made, when some people are really making it, there is a happy opportunity for ingenious mendacity. Almost everything will be believed for a little while.
In the wake of the 2008–2009 crisis, Grant calls Lombard Street “fresh again.” Bagehot was in many ways a man of his time, but he is also a man of our time: “If he did not invent the doctrine of the lender of last resort,” writes Grant, “he did canonize it.”