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Lombard Street: A Description of the Money Market.
Walter Bagehot
CHAPTER I - Introductory
I venture to call this Essay `Lombard Street,' and not the `Money Market,' or any such phrase,
because I wish to deal, and to show that I mean to deal, with concrete realities. A notion prevails
that the Money Market is something so impalpable that it can only be spoken of in very abstract
words, and that therefore books on it must always be exceedingly difficult. But I maintain that the
Money Market is as concrete and real as anything else; that it can be described in as plain words;
that it is the writer's fault if what he says is not clear. In one respect, however, I admit that I am about
to take perhaps an unfair advantage. Half, and more than half, of the supposed `difficulty' of the
Money Market has arisen out of the controversies as to `Peel's Act,' and the abstract discussions on
the theory on which that act is based, or supposed to be based. But in the ensuing pages I mean to
speak as little as I can of the Act of 1844; and when I do speak of it, I shall deal nearly exclusively
with its experienced effects, and scarcely at all, if at all, with its refined basis.
For this I have several reasons,one, that if you say anything about the Act of 1844, it is little matter
what else you say, for few will attend to it. Most critics will seize on the passage as to the Act, either
to attack it or defend it, as if it were the main point. There has been so much fierce controversy as to
this Act of Parliamentand there is still so much animositythat a single sentence respecting it is far
more interesting to very many than a whole book on any other part of the subject. Two hosts of
eager disputants on this subject ask of every new writer the one questionAre you with us or against
us? and they care for little else. Of course if the Act of 1844 really were, as is commonly thought, the
primum mobile of the English Money Market,the source of all good according to some, and the
source of all harm according to others,the extreme irritation excited by an opinion on it would be no
reason for not giving a free opinion. A writer on any subject must not neglect its cardinal fact, for fear
that others may abuse him. But, in my judgment, the Act of 1844 is only a subordinate matter in the
Money Market; what has to be said on it has been said at disproportionate length; the phenomena
connected with it have been magnified into greater relative importance than they at all deserve. We
must never forget that a quarter of a century has passed since 1844,a period singularly remarkable
for its material progress, and almost marvellous in its banking development. Even, therefore, if the
facts so much referred to in 844 had the importance then ascribed to them,and I believe that in
some respects they were even then overstated,there would be nothing surprising in finding that in a
new world new phenomena had arisen which now are larger and stronger. In my opinion this is the
truth: since 1844, Lombard Street is so changed that we cannot judge of it without describing and
discussing a most vigorous adult world which then was small and weak. On this account I wish to
say as little as is fairly possible of the Act of 844, and, as far as I can, to isolate and dwell
exclusively on the `Post- Peel' agencies, so that those who have had enough of that well- worn
theme (and they are very many) may not be wearied, and that the new and neglected parts of the
subject may be seen as they really are.
The briefest and truest way of describing Lombard Street is to say that it is by far the greatest
combination of economical power and economical delicacy that the world has even seen. Of the
greatness of the power there will be no doubt. Money is economical power. Everyone is aware that
England is the greatest moneyed country in the world; everyone admits that it has much more
immediately disposable and ready cash than any other country. But very few persons are aware
how much greater the ready balancethe floating loan-fund which can be lent to anyone or for any
purposeis in England than it is anywhere else in the world. A very few figures will show how large
the London loan-fund is, and how much greater it is than any other. The known depositsthe deposits
of banks which publish their accountsare, in
£
London (31st December, 1872) 120,000,000
Paris (27th February, 1873) 13,000,000
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New York (February, 1873) 40,000,000
German Empire (31st January, 1873) 8,000,000
And the unknown depositsthe deposits in banks which do not publish their accountsare in London
much greater than those many other of these cities. The bankers' deposits of London are many
times greater than those of any other citythose of Great Britain many times greater than those of any
other country.
Of course the deposits of bankers are not a strictly accurate measure of the resources of a Money
Market. On the contrary, much more cash exists out of banks in France and Germany, and in all
non-banking countries, than could be found in England or Scotland, where banking is developed.
But that cash is not, so to speak, `money-market money:' it is not attainable. Nothing but their
immense misfortunes, nothing but a vast loan in their own securities, could have extracted the
hoards of France from the custody of the French people. The offer of no other securities would have
tempted them, for they had confidence in no other securities. For all other purposes the money
hoarded was useless and might as well not have been hoarded. But the English money is
`borrowable' money. Our people are bolder in dealing with their money than any continental nation,
and even if they were not bolder, the mere fact that their money is deposited in a bank makes it far
more obtainable. A million in the hands of a single banker is a great power; he can at once lend it
where he will, and borrowers can come to him, because they know or believe that he has it. But the
same sum scattered in tens and fifties through a whole nation is no power at all: no one knows
where to find it or whom to ask for it. Concentration of money in banks, though not the sole cause, is
the principal cause which has made the Money Market of England so exceedingly rich, so much
beyond that of other countries.
The effect is seen constantly. We are asked to lend, and do lend, vast sums, which it would be
impossible to obtain elsewhere. It is sometimes said that any foreign country can borrow in Lombard
Street at a price: some countries can borrow much cheaper than others; but all, it is said, can have
some money if they choose to pay enough for it. Perhaps this is an exaggeration; but confined, as of
course it was meant to be, to civilised Governments, it is not much of an exaggeration. There are
very few civilised Governments that could not borrow considerable sums of us if they choose, and
most of them seem more and more likely to choose. If any nation wants even to make a
railwayespecially at all a poor nationit is sure to come to this countryto the country of banksfor the
money. It is true that English bankers are not themselves very great lenders to foreign states. But
they are great lenders to those who lend. They advance on foreign stocks, as the phrase is, with `a
margin;' that is, they find eighty per cent of the money, and the nominal lender finds the rest. And it
is in this way that vast works are achieved with English aid which but for that aid would never have
been planned.
In domestic enterprises it is the same. We have entirely lost the idea that any undertaking likely to
pay, and seen to be likely, can perish for want of money; yet no idea was more familiar to our
ancestors, or is more common now in most countries. A citizen of London in Queen Elizabeth's time
could not have imagined our state of mind. He would have thought that it was of no use inventing
railways (if he could have understood what a railway meant), for you would not have been able to
collect the capital with which to make them. At this moment, in colonies and all rude countries, there
is no large sum of transferable money; there is no fund from which you can borrow, and out of which
you can make immense works. Taking the world as a whole-either now or in the pastit is certain that
in poor states there is no spare money for new and great undertakings, and that in most rich states
the money is too scattered, and clings too close to the hands of the owners, to be often obtainable in
large quantities for new purposes. A place like Lombard Street, where in all but the rarest times
money can be always obtained upon good security or upon decent prospects of probable gain, is a
luxury which no country has ever enjoyed with even comparable equality before.
But though these occasional loans to new enterprises and foreign States are the most conspicuous
instances of the power of Lombard Street, they are not by any means the most remarkable or the
most important use of that power. English trade is carried on upon borrowed capital to an extent of
which few foreigners have an idea, and none of our ancestors could have conceived. In every
district small traders have arisen, who `discount their bills' largely, and with the capital so borrowed,
harass and press upon, if they do not eradicate, the old capitalist. The new trader has obviously an
immense advantage in the struggle of trade. If a merchant have 50,000 l. all his own,to gain 10 per
cent on it he must make 5,000 l. a year, and must charge for his goods accordingly; but if another
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has only 10,000 l., and borrows 40,000 l. by discounts (no extreme instance in our modem trade),
he has the same capital of 50,000 l. to use, and can sell much cheaper. If the rate at which he
borrows be 5 per cent., he will have to pay 2,000 l. a year; and if, like the old trader, he make 5,000
l. a year, he will still, after paying his interest, obtain 3,000 l. a year, or 30 per cent, on his own
10,000 l. As most merchants are content with much less than 30 per cent, he will be able, if he
wishes, to forego some of that profit, lower the price of the commodity, and drive the old-fashioned
traderthe man who trades on his own capitalout of the market. In modem English business, owing to
the certainty of obtaining loans on discount of bills or otherwise at a moderate rate of interest, there
is a steady bounty on trading with borrowed capital, and a constant discouragement to confine
yourself solely or mainly to your own capital.
This increasingly democratic structure of English commerce is very unpopular in many quarters, and
its effects are no doubt exceedingly mixed. On the one hand, it prevents the long duration of great
families of merchant princes, such as those of Venice and Genoa, who inherited nice cultivation as
well as great wealth, and who, to some extent, combined the tastes of an aristocracy with the insight
and verve of men of business. These are pushed out, so to say, by the dirty crowd of little men. After
a generation or two they retire into idle luxury. Upon their immense capital they can only obtain low
profits, and these they do not think enough to compensate them for the rough companions and rude
manners they must meet in business. This constant levelling of our commercial houses is, too,
unfavourable to commercial morality. Great firms, with a reputation which they have received from
the past, and which they wish to transmit to the future, cannot be guilty of small frauds. They live by
a continuity of trade, which detected fraud would spoil. When we scrutinise the reason of the
impaired reputation of English goods, we find it is the fault of new men with little money of their own,
created by bank `discounts.' These men want business at once, and they produce an inferior article
to get it. They rely on cheapness, and rely successfully.
But these defects and others in the democratic structure of commerce are compensated by one
great excellence. No country of great hereditary trade, no European country at least, was ever so
little `sleepy,' to use the only fit word, as England; no other was ever so prompt at once to seize new
advantages. A country dependent mainly on great `merchant princes' will never be so prompt; their
commerce perpetually slips more and more into a commerce of routine. A man of large wealth,
however intelligent, always thinks, more or less'I have a great income, and I want to keep it. If things
go on as they are I shall certainly keep it; but if they change I may not keep it.' Consequently he
considers every change of circumstance a `bore,' and thinks of such changes as little as he can. But
a new man, who has his way to make in the world, knows that such changes are his opportunities;
he is always on the look-out for them, and always heeds them when he finds them. The rough and
vulgar structure of English commerce is the secret of its life; for it contains `the propensity to
variation,' which, in the social as in the animal kingdom, is the principle of progress.
In this constant and chronic borrowing, Lombard Street is the great go-between. It is a sort of
standing broker between quiet saving districts of the country and the active employing districts. Why
particular trades settled in particular places it is often difficult to say; but one thing is certain, that
when a trade has settled in any one spot, it is very difficult for another to oust itimpossible unless the
second place possesses some very great intrinsic advantage. Commerce is curiously conservative
in its homes, unless it is imperiously obliged to migrate. Partly from this cause, and partly from
others, there are whole districts in England which cannot and do not employ their own money. No
purely agricultural county does so. The savings of a county with good land but no manufactures and
no trade much exceed what can be safely lent in the county. These savings are first lodged in the
local banks, are by them sent to London, and are deposited with London bankers, or with the bill
brokers. In either case the result is the same. The money thus sent up from the accumulating
districts is employed in discounting the bills of the industrial districts. Deposits are made with the
bankers and bill brokers in Lombard Street by the bankers of such counties as Somersetshire and
Hampshire, and those bill brokers and bankers employ them in the discount of bills from Yorkshire
and Lancashire. Lombard Street is thus a perpetual agent between the two great divisions of
England, between the rapidly-growing districts, where almost any amount of money can be well and
easily employed, and the stationary and the declining districts, where there is more money than can
be used.
This organisation is so useful because it is so easily adjusted. Political economists say that capital
sets towards the most profitable trades, and that it rapidly leaves the less profitable and non-paying
trades. But in ordinary countries this is a slow process, and some persons who want to have ocular
demonstration of abstract truths have been inclined to doubt it because they could not see it. In
England, however, the process would be visible enough if you could only see the books of the bill
brokers and the bankers. Their bill cases as a rule are full of the bills drawn in the most profitable
trades, and caeteris paribus and in comparison empty of those drawn in the less profitable. If the
iron trade ceases to be as profitable as usual, less iron is sold; the fewer the sales the fewer the
bills; and in consequence the number of iron bills in Lombard street is diminished. On the other
hand, if in consequence of a bad harvest the corn trade becomes on a sudden profitable,
immediately `corn bills' are created in great numbers, and if good are discounted in Lombard Street.
Thus English capital runs as surely and instantly where it is most wanted, and where there is most
to be made of it, as water runs to find its level.
This efficient and instantly-ready organisation gives us an enormous advantage in competition with
less advanced countriesless advanced, that is, in this particular respect of credit. In a new trade
English capital is instantly at the disposal of persons capable of understanding the new
opportunities and of making good use of them. In countries where there is little money to lend, and
where that little is lent tardily and reluctantly, enterprising traders are long kept back, because they
cannot at once borrow the capital, without which skill and knowledge are useless. All sudden trades
come to England, and in so doing often disappoint both rational probability and the predictions of
philosophers. The Suez Canal is a curious case of this. All predicted that the canal would undo what
the discovery of the passage to India round the Cape effected. Before that all Oriental trade went to
ports in the South of Europe, and was thence diffused through Europe. That London and Liverpool
should be centres of East Indian commerce is a geographical anomaly, which the Suez Canal, it
was said, would rectify. `The Greeks,' said M. de Tocqueville, `the Styrians, the Italians, the
Dalmatians, and the Sicilians, are the people who will use the Canal if any use it.' But, on the
contrary, the main use of the Canal has been by the English. None of the nations named by
Tocqueville had the capital, or a tithe of it, ready to build the large screw steamers which alone can
use the Canal profitably. Ultimately these plausible predictions may or may not be right, but as yet
they have been quite wrong, not because England has rich peoplethere are wealthy people in all
countriesbut because she possesses an unequalled fund of floating money, which will help in a
moment any merchant who sees a great prospect of new profit.
And not only does this unconscious `organisation of capital,' to use a continental phrase, make the
English specially quick in comparison with their neighbours on the continent at seizing on novel
mercantile opportunities, but it makes them likely also to retain any trade on which they have once
regularly fastened. Mr. Macculloch, following Ricardo, used to teach that all old nations had a
special aptitude for trades in which much capital is required. The interest of capital having been
reduced in such countries, he argued, by the necessity of continually resorting to inferior soils, they
can undersell countries where profit is high in all trades needing great capital. And in this theory
there is doubtless much truth, though it can only be applied in practice after a number of limitations
and with a number of deductions of which the older school of political economists did not take
enough notice. But the same principle plainly and practically applies to England, in consequence of
her habitual use of borrowed capital. As has been explained, a new man, with a small capital of his
own and a large borrowed capital, can undersell a rich man who depends on his own capital only.
The rich man wants the full rate of mercantile profit on the whole of the capital employed in his
trade, but the poor man wants only the interest of money (perhaps not a third of the rate of profit) on
very much of what he uses, and therefore an income will be an ample recompense to the poor man
which would starve the rich man out of the trade. All the common notions about the new competition
of foreign countries with England and its dangersnotions in which there is in other aspects much
truth require to be reconsidered in relation to this aspect. England has a special machinery for
getting into trade new men who will be content with low prices, and this machinery will probably
secure her success, for no other country is soon likely to rival it effectually.
There are many other points which might be insisted on, but it would be tedious and useless to
elaborate the picture. The main conclusion is very plainthat English trade is become essentially a
trade on borrowed capital, and that it is only by this refinement of our banking system that we are
able to do the sort of trade we do, or to get through the quantity of it.
But in exact proportion to the power of this system is its delicacy I should hardly say too much if I
said its danger. Only our familiarity blinds us to the marvellous nature of the system. There never
was so much borrowed money collected in the world as is now collected in London. Of the many
millions in Lombard street, infinitely the greater proportion is held by bankers or others on short
notice or on demand; that is to say, the owners could ask for it all any day they please: in a panic
some of them do ask for some of it. If any large fraction of that money really was demanded, our
banking system and our industrial system too would be in great danger.
Some of those deposits too are of a peculiar and very distinct nature. Since the Franco-German
war, we have become to a much larger extent than before the Bankers of Europe. A very large sum
of foreign money is on various accounts and for various purposes held here. And in a time of panic it
might be asked for. In 1866 we held only a much smaller sum of foreign money, but that smaller
sum was demanded and we had to pay it at great cost and suffering, and it would be far worse if we
had to pay the greater sums we now hold, without better resources than we had then.
It may be replied, that though our instant liabilities are great, our present means are large; that
though we have much we may be asked to pay at any moment, we have very much always ready to
pay it with. But, on the contrary, there is no country at present, and there never was any country
before, in which the ratio of the cash reserve to the bank deposits was so small as it is now in
England.
(1)
So far from our being able to rely on the proportional magnitude of our cash in hand, the
amount of that cash is so exceedingly small that a bystander almost trembles when he compares its
minuteness with the immensity of the credit which rests upon it.
Again, it may be said that we need not be alarmed at the magnitude of our credit system or at its
refinement, for that we have learned by experience the way of controlling it, and always manage it
with discretion. But we do not always manage it with discretion. There is the astounding instance of
Overend, Gurney, and Co. to the contrary. Ten years ago that house stood next to the Bank of
England in the City of London; it was better known abroad than any similar firm known, perhaps,
better than any purely English firm. The partners had great estates, which had mostly been made in
the business. They still derived an immense income from it. Yet in six years they lost all their own
wealth, sold the business to the company, and then lost a large part of the company's capital. And
these losses were made in a manner so reckless and so foolish, that one would think a child who
had lent money in the City of London would have lent it better. After this example, we must not
confide too surely in long-established credit, or in firmly-rooted traditions of business. We must
examine the system on which these great masses of money are manipulated, and assure ourselves
that it is safe and right.
But it is not easy to rouse men of business to the task. They let the tide of business float before
them; they make money or strive to do so while it passes, and they are unwilling to think where it is
going. Even the great collapse of Overends, though it caused a panic, is beginning to be forgotten.
Most men of business think'Anyhow this system will probably last my time. It has gone on a long
time, and is likely to go on still.' But the exact point is, that it has not gone on a long time. The
collection of these immense sums in one place and in few hands is perfectly new. In 1844 the
liabilities of the four great London Joint Stock Banks were 10,637,000 l.; they now are more than
60,000,000 l. The private deposits of the Bank of England then were 9,000,000 l.; they now are
8,000,000 l. There was in throughout the country but a fraction of the vast deposit business which
now exists. We cannot appeal, therefore, to experience to prove the safety of our system as it now
is, for the present magnitude of that system is entirely new. Obviously a system may be fit to
regulate a few millions, and yet quite inadequate when it is set to cope with many millions. And thus
it may be with `Lombard Street,' so rapid has been its growth, and so unprecedented is its nature.
I am by no means an alarmist. I believe that our system, though curious and peculiar, may be
worked safely; but if we wish so to work it, we must study it. We must not think we have an easy
task when we have a difficult task, or that we are living in a natural state when we are really living in
an artificial one. Money will not manage itself, and Lombard street has a great deal of money to
manage.
CHAPTER II - A General View of Lombard Street
I.
The objects which you see in Lombard Street, and in that money world which is grouped about it,
are the Bank of England, the Private Banks, the Joint Stock Banks, and the bill brokers. But before
describing each of these separately we must look at what all have in common, and at the relation of
each to the others.
The distinctive function of the banker, says Ricardo, `begins as soon as he uses the money of
others;' as long as he uses his own money he is only a capitalist. Accordingly all the banks in
Lombard Street (and bill brokers are for this purpose only a kind of bankers) hold much money
belonging to other people on running account and on deposit. In continental language, Lombard
Street is an organization of credit, and we are to see if it is a good or bad organization in its kind, or
if, as is most likely, it turn out to be mixed, what are its merits and what are its defects?
The main point on which one system of credit differs from another is `soundness.' Credit means that
a certain confidence is given, and a certain trust reposed. Is that trust justified? and is that
confidence wise? These are the cardinal questions. To put it more simplycredit is a set of promises
to pay; will those promises be kept? Especially in banking, where the `liabilities,' or promises to pay,
are so large, and the time at which to pay them, if exacted, is so short, an instant capacity to meet
engagements is the cardinal excellence.
All which a banker wants to pay his creditors is a sufficient supply of the legal tender of the country,
no matter what that legal tender may be. Different countries differ in their laws of legal tender, but for
the primary purposes of banking these systems are not material. A good system of currency will
benefit the country, and a bad system will hurt it. Indirectly, bankers will be benefited or injured with
the country in which they live; but practically, and for the purposes of their daily life, they have no
need to think, and never do think, on theories of currency. They look at the matter simply. They say
`I am under an obligation to pay such and such sums of legal currency; how much have I in my till,
or have I at once under my command, of that currency?' In America, for example, it is quite enough
for a banker to hold `greenbacks,' though the value of these changes as the Government chooses to
enlarge or contract the issue. But a practical New York banker has no need to think of the goodness
or badness of this system at all; he need only keep enough `greenbacks' to pay all probable
demands, and then he is fairly safe from the risk of failure.
By the law of England the legal tenders are gold and silver coin (the last for small amounts only),
and Bank of England notes. But the number of our attainable bank notes is not, like American
`greenbacks,' dependent on the will of the State; it is limited by the provisions of the Act of 1844.
That Act separates the Bank of England into two halves. The Issue Department only issues notes,
and can only issue 15,000,000 l. on Government securities; for all the rest it must have bullion
deposited. Take, for example an account, which may be considered an average specimen of those
of the last few yearsthat for the last week of 1869:
An account pursuant to the Act 7th and 8th Victoria, cap. 32, for the week ending on Wednesday,
the 29th day of December, 1869.
ISSUE DEPARTMENT.
£ £
Notes issued 33,288,640 Government debt 11,015,100
Other securities 3,984,900
Gold coin and bullion 18,288,640
Silver bullion
33,288,640 33,288,640
BANKING DEPARTMENT.
£ £
Proprietors' capital 14,553,000 Government
securities
13,811,953
Res