Lombard Street (Bagehot)

BIBLIOGRAPHY

In the second half of the nineteenth century, world financial activity was centered in London. Within the city, the core of the financial district was Lombard Street, named after the bankers and financiers from northern Italy who centuries before had established their businesses there. In 1873, Walter Bagehot, editor of The Economist magazine, published a book that explained the workings of the London financial market. He titled it Lombard Street: A Description of the Money Market.

Lombard Street quickly became the main resource for understanding the workings of the London financial industry, replacing Henry Thornton’s Enquiry into the Nature and Effects of the Paper Credit of Great Britain, published seven decades earlier in 1802. In Lombard Street, Bagehot briefly surveyed the origins of the London market and the reasons for its existence before undertaking a detailed description of the functions of a host of financial market participants, both public and private.

Lombard Street examines both the technical workings of the market and the government’s policy actions within the market, as determined by the chancellor of the Exchequer and the directors of the Bank of England. It describes the activities of joint-stock banks, private banks, and bill brokers, all of which was of great interest to large numbers of contemporary readers. But the signal contribution of Lombard Street is Bagehot’s discussion of how the Bank of England should behave toward other banks, especially when the money market was under stress.

The Bank Charter Act of 1844 had separated the Bank of England into an Issue Department, which issued bank notes backed by gold reserves, and a Banking Department, which was free to behave like an ordinary commercial bank. Critics of the Bank Act, including Bagehot’s father-in-law James Wilson, founder of The Economist, argued throughout the 1850s and 1860s that the Bank’s support of the money market during commercial crises was crucial and that the Bank of England should hold larger reserves of gold to meet the increased demand for gold during such periods. However, none of the critics developed a well-rounded case for the Bank to act as a central bank before Bagehot wrote.

Bagehot recognized that, though the Bank of England had no legal obligation to act as the nation’s central bank, it in fact had done so since before 1800. Because the Bank kept the gold reserve for the entire economy, it had no choice but to act as a central bank. This meant that the Bank of England had to meet the banking system’s liquidity needs during crises and that the Bank should act as lender of last resort when the increased demand to hold gold by individuals threatened the ability of solvent banks to meet their commitments.

Although the principle that the Bank of England would act as the banking system’s lender of last resort was widely accepted after 1873, the British government implemented no legislation requiring the Bank to do so. Rather, the government assumed that the Bank would conduct its business appropriately. The Bank in fact did not hold larger gold reserves after 1873; in relation to the size of the banking system, the Bank’s reserve shrank. The absence of any major crises over the next four decades prevents historians from knowing how the Bank of England would have behaved during a crisis.

SEE ALSO Economic Crises; Finance; Financial Instability Hypothesis; Financial Markets; Fleet Street; Lender of Last Resort; Wall Street

BIBLIOGRAPHY

Bagehot, Walter. [1873] 1999. Lombard Street: A Description of the Money Market. New York: John Wiley & Sons.

Thornton, Henry. [1802] 1978. An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, ed. F. A. von Hayek. Fairfield, NJ: A. M. Kelley.

Wood, John H. 2003. Bagehot’s Lender of Last Resort: A Hollow Hallowed Tradition. The Independent Review 7 (3): 343–351.

Neil T. Skaggs