James Grant is more than a highly respected writer and commentator on financial markets. He’s also an accomplished biographer, having published books on John Adams and Thomas B. Reed, who twice was Speaker of the House at the close of the 19th century. Grant’s “Bagehot” combines his skill in both fields in a way that is as polished as it is informative and thought-provoking.
“Bagehot” tells two stories, both with the kind of detailed research, sharp analysis, insightful observations, clever asides, tangential references, verbal darts, and interesting allusions that will make admirers of Grant’s style smile and detractors…well, continue detracting.
The first story is a straightforward, well-paced biography of Bagehot, the great financial writer and editor of The Economist who also was a successful banker, man of letters, political writer, and long-time adviser to the highest members of mid-and-late 19th century British governments, both Tory and Liberal.
The second tale, which Grant skillfully weaves throughout his discussion of Bagehot’s financial writing, is a pointed but balanced excursion into a key topic in the history of monetary policy: responsibility. Specifically, Grant examines in detail the 19th-century roots of what we now call moral hazard. When financial bubbles burst, who should bear the risks associated with the business of extending credit – the private or corporate issuers themselves, or the Bank of England as lender of last resort? What might be the unintended consequences for the financial system if a central bank were to back-stop credit?
Bagehot played a key role in that debate from his perch at The Economist. He sided with the lender-of-last-resort view, and condensed it into the famous maxim that, in a panic, a central bank should lend freely at high interest rates against high-quality collateral. (At least, that was his original phrasing; the words “high” and “quality have quietly has been forgotten over the years). Bagehot put his views between hard covers in his book “Lombard Street,” and, for better or worse, they have reverberated down the years. Indeed, Ben Bernanke has written that he kept “Lombard Street” by his side during the great credit crisis.
On the opposite side of the lender-of-last-resort debate was the now-forgotten Thomson Hankey. He was as an insightful thinker about finance and a formidable opponent, but he was a dry-as-dust writer, which helped Bagehot – a sparkling stylist – carry the day. Grant quotes Hankey extensively, and, good editor that he is, often comes to his aid with a clarifying re-write. One example: “A good banker had no need of a central bank and a bad banker had no claim on a central bank.” Another: “…the mere existence of the doctrine of the lender of last resort was an incitement to financial recklessness.” And, tellingly, Grant observes that Hankey, not Bagehot, “grasped...the modern corollary that very large financial institutions should be treated as quasi-public property.”
Grant’s “Bagehot” isn’t exactly beach reading, but summer’s over. Anyone who enjoys excellent writing and values insightful thinking ought to set aside some time for this book.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I have no personal acquaintance with the author or publisher of this book.