Lombard Street: A Description of the Money Market
By Walter Bagehot
Introduction
by Lauren Landsburg
When I was a graduate student in international monetary theory, my adviser and others occasionally suggested that I read Walter Bagehot some time. Because I was a graduate student, I doubted that any writer on “institutions” from the 1800s could be worth my time, so of course I didn’t even look the book up. My mistake!
When Walter Bagehot wrote Lombard Street: A Description of the Money Market, in 1873, he did the unthinkable: In language as fresh and clear today as it was over 100 years ago, he respectfully dissected the Bank of England’s foundations, economic incentives, goals, and functions. In the process, he illuminated in a mere few hundred brilliant pages what distinguishes a Central Bank from a commercial bank, both on a daily basis and during crises such as bank panics and recessions. The constitutions of most national Central Banks were reinvented and forever changed as a consequence. The U.S. Federal Reserve, founded in late 1913, and the Central Bank of Central Banks—the International Monetary Fund (IMF)—have ever since been influenced by the enduring independent thought and extraordinary clarity provided by Bagehot in this famous book.
Bagehot’s book was so readable and so remarkable that it was re-issued three times within a year, and was republished in many editions both during his lifetime and afterwards.
Our choice at Econlib, after studying several editions, is to provide the main text the way it was at the end of 1873 (in Bagehot’s third edition, printed within the first year of publication). In doing so, we hope we have caught any errors Bagehot himself may have noticed, while preserving the original language and authoritative care taken in the various quotations.
But: We are also adding some footnotes and a second Appendix provided later (that is, after Bagehot’s death in 1877): specifically, material from the 12th Edition (1906) and from the 14th Edition (1915). We believe that these later additions reflect the historical influence and popularity of this book during a period of time when the incipient Federal Reserve and other international Central Banks were founded and were, during their emergence, greatly influenced by it. The later footnotes are marked according to their editions. We have also included various prefaces, introductions, and Bagehot’s own “Advertisement,” to editions through the 14th, which explain who wrote which of the additions: E. Johnstone, A. W. Wright, and Hartley Withers all contributed.
We have preserved intact all of Bagehot’s original spellings, capitalization, and punctuation from the third edition, with the minor alteration that in a few cases we’ve indented long quotations from other sources for the sake of visual clarity. We’ve also preserved the punctuation and spelling of the additional material from later editions; thus, the observant reader will notice that punctuation differs in style in footnotes from later editions.
Lauren Landsburg
Editor, Library of Economics and Liberty
May, 2001
Translator/Editor
E. Johnstone; Hartley Withers, eds.
First Pub. Date
1873
Publisher
London: Henry S. King and Co.
Pub. Date
1873
Comments
Includes editorial notes and appendices from the 12th (1906) and the 14th (1915) editions.
Copyright
The text of this edition is in the public domain. Picture of Walter Bagehot courtesy of The Warren J. Samuels Portrait Collection at Duke University.
- advertisement
- prefaces
- Introductions, by Hartley Withers
- Chapter II, A General View of Lombard Street
- Chapter III, How Lombard Street Came to Exist
- Chapter IV, The Position of the Chancellor of the Exchequer in the Money Market
- Chapter V, The Mode in Which the Value of Money is Settled in Lombard Street
- Chapter VI, Why Lombard Street Is Often Very Dull, and Sometimes Extremely Excited
- Chapter VII, A More Exact Account of the Mode in Which the Bank of England Has Discharged Its Duty of Retaining a Good Bank Reserve
- Chapter VIII, The Government of the Bank of England
- Chapter IX, The Joint Stock Banks
- Chapter X, The Private Banks
- Chapter XI, The Bill-Brokers
- Chapter XII, The Principles Which Should Regulate the Amount of Banking Reserve
- Chapter XIII, Conclusion
- Appendix I
- Appendix II
Appendix II
By E. Johnstone
Note I
This pre-eminent position in regard to the relative magnitude of its resources the London Market has not fully maintained. The deposits of the metropolitan banks have indeed enormously increased. They amounted at the end of December, 1905, to £504,000,000; but in this total was comprised (as closely as can be estimated, since, owing to amalgamations, an exact comparison is impossible) about £230,000,000 held by banks which were not included in the statement for December 31, 1872, most of them banks with country branches, and which hold, therefore, a great deal of provincial as well as London money. Allowing for this, a greater relative increase is shown by the New York associated banks, whose deposits at the end of 1905 (including Government deposits) amounted to a little over £195,000,000 as compared with the £40,000,000 held by then in 1873. But, as in the case of the London banks, the deposits of the New York banks include a large amount consisting of the balances of other banks throughout the country. In Germany also there has been a great development of deposit banking, Unfortunately the German statistics are drawn up in a form which renders any comparison with those of the British banks exceedingly difficult, if not impossible. The German banks place under “deposits” only such amounts as are left with them upon call or for specific terms, usually three or six months. There is, however, another heading, “Creditors,” under which is included amounts due to account holders on account current business, and apparently some other forms of liability. According to the
Frankfurter Zeitung, the “deposits” of the eight largest Berlin banks (exclusive of the Reichsbank) amounted at the end of 1905 to £52,100,000, and their “creditors” to £93,463,000. And, in addition, the Reichsbank at that date owed its current account holders £24,105,000. The
Frankfurter Zeitung also gives statistics of the forty leading banks of the Empire—that is, banks having a capital of not less than £500,000 (but not including the Reichsbank). At the end of 1905 these held in “deposits” £73,736,000, and in “creditors” £144,223,000. Nor is it only that the resources of the German banks have greatly increased; these banks now play a much more important part in cosmopolitan finance. Berlin is now an important market for foreign loans, and through the instrumentality of the banks large amounts of German capital have been embarked in foreign industrial enterprises. The growth of these and other markets, however, has not operated to the relief of “Lombard Street.” On the contrary, it has added to the delicacy of its position. It has increased the magnitude of the demands for gold that may be made upon us in times of pressure, and thus renders it more necessary than ever that the Bank of England should maintain an adequate reserve.
NOTE II
On December 31, 1891, the deposits of these four banks amounted to £70,000,000, but owing to amalgamations which have altered the identity of two out of the four, the further growth of the deposits since Mr. Bagehot wrote cannot be accurately traced. Some indication of it, however, may be gathered from the fact that the purely Metropolitan banks (including one of comparatively small magnitude) held on December 31, 1905, deposits to the amount of £78,000,000, and at the same date ten London banks with country branches held between there deposits aggregating over £374,000,000. The private deposits of the Bank of England on December 27, 1905, amounted to £44,000,000.
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