holder who earned that amount. ‘People with secure incomes are richer than people with only precarious ones.’ Fairness was an issue: ‘People think that the more rich should be taxed more than the less rich.’38 In 1864 the Economist reversed its earlier insistence under Wilson that all factory legislation, even to protect children from overwork or injury, amounted to an assault on free trade.39 The next year it endorsed state ownership of railways, comparing the plan to the penny-post reform, which ensured a cheap, efficient, national parcel network.40 Trade unions did restrain trade, but they were ‘real forces of the industrial world which the law did not make, and which it cannot unmake’; better to recognize them, with special laws to punish intimidation and sabotage by their members.41 Even women, after hesitations and qualifications, got some sort of break – though Bagehot’s admirers are stretching the truth when they call him an advocate of female suffrage. Votes for women on any wide basis was an absurdity that only John Stuart Mill took seriously, he wrote in 1865. Five years later, Bagehot was ready to concede only ‘a certain legal plausibility in the claim’ that unmarried female property owners might obtain the vote on the same grounds as men – even if he thought very little of the ‘political intelligence’ of the ‘spinsters’, ‘widows’ and other ‘lonely women’ that would exercise it.42
For all this Bagehot did not count himself among the ‘heresiarchs’: by showing greater flexibility he hoped to update laissez-faire at the Economist, not overturn it. In the part of Economic Studies he had completed by 1876, he celebrated the ‘wonderful effect’ of ‘English political economy’ since the publication of Adam Smith’s Wealth of Nations a hundred years before. ‘The life of almost everyone in England – perhaps of everyone – is different and better in consequence of it. The whole commercial policy of the country is not so much founded on it as instinct with it.’ Indeed, ‘no other form of political philosophy has ever had one thousandth part the influence on us,’ he went on, ‘its teachings have settled down into the common sense of the nation, and have become irreversible’.43 Bagehot criticized newer rivals to this ‘English-school’ of political economy: on the one hand, the ‘enumerative’ or ‘all case method’ of the German Historical School; on the other, the neo-classical or marginal revolution that was just starting to take off. ‘Mr Jevons of Manchester, and M. Walras of Lausanne, without communication, and almost simultaneously, have worked out a “mathematical” theory of political economy’, Bagehot wrote of the latter school; ‘and anyone who thinks what is ordinarily taught in England objectionable, because it is too little concrete in its method, and looks too unlike life and business, had better try the new doctrine, which he will find to be much worse on these points than the old.’44
Bagehot’s mission as Economist editor was to teach a common sense science of political economy, ‘the science of business’, whose chief merit was its ability to adapt to changing circumstances – in his era, the increasing weight of global finance in Victorian capitalism. Export of capital on a large scale was a new phenomenon in Britain, coinciding with Bagehot’s career: from low levels of 1 to 1.5 per cent of gross national product in the forty years prior to 1850, average net foreign investment leapt to 2.1 per cent in the 1850s and to 2.8 per cent in the 1860s; and as Bagehot foresaw, it kept rising, averaging 4.3 per cent between 1870 and 1913, at which point net overseas assets accounted for 32 per cent of national wealth – a larger share than for any country before or since. If the surpluses for this boom arose in part from Britain’s early industrial monopoly, it soon developed dynamics of its own.45 ‘Banking in England goes on growing, multiplying, and changing, as the English people itself goes on growing, multiplying, and changing. The facts of it are one thing today and another tomorrow.’46 ‘England has become the settling place of international bargains much more than it was before’, he observed. ‘But whose mind could divine the effect of such a change as this, except it had a professed science to help it?’ A new wave of investment in ‘half-finished’ and ‘half-civilised communities’ flowed abroad. ‘Who can tell without instruction what is likely to be the effect of the new loans of England to foreign nations?’ Such easy access to credit, and on a global scale, was unprecedented in human history. It fell to Bagehot’s Economist to map this new world, tracing the theoretical insights of political economy to the people and places men of business were sending their money.47
Central Banking Rules
It was in the halfway-house between theory and practice that Bagehot made his contributions to financial history, where the legacy of his editorship was the construction of a role and set of rules for central banking in the age of global capital. On these matters, his opinion carried great weight. Gladstone dubbed him a ‘supplementary Chancellor of the Exchequer’ and consulted him on policies such as the Bank Notes Issue Bill, with Bagehot promising ‘the entire assent and substantial support of the issuing bankers’.48 Contemporaries credited him with inventing the Treasury Bill in 1877, when he advised Gladstone’s successor as Chancellor, Sir Stafford Northcote, to replace ‘Exchequer Bills’ with a modern, easily traded instrument, to ‘resemble as near as possible a Bill of Exchange’. ‘The Treasury has the finest security in the world, but has not known how to use it’, Bagehot explained privately. ‘Such a Bill would rank before a Bill of Barings.’49
The Economist was the source of this authority as well as the most important outlet for his views on bringing stability to the financial system – which by all accounts needed more of it: crises were frequent, either beginning in the City of London or passing through it infinitely magnified, as the spoke around which international finance now turned. At home, the panic of 1866 was among the most spectacular, dominating Economist coverage of the money market long afterwards. In that year one of the City’s great wholesale banking houses, Overend, Gurney & Co., failed soon after it had raised large sums by incorporating as a company with limited liability. After the stock market crashed, a bank run ensued. For Bagehot, the episode demonstrated beyond a doubt that the Bank of England, which at first refused to intervene, was unlike all other banks and discount houses, and Bagehot told Gladstone as much during the crisis, over breakfast on 31 May.50
Bagehot also developed this argument in countless Economist leaders, distilled into a standalone book in 1873, Lombard Street. Since it was backed by government and held the nation’s reserves, the Bank of England had an important duty. When credit dried up during a crisis like the one that felled Overend, Gurney & Co., it must act as lender of last resort, until confidence returned, using two guiding rules: advances must be at a ‘very high rate of interest’ and made on ‘all good banking securities’, thereby limiting the bailout pool to ‘solvent’ but ‘illiquid’ banks, and encouraging rapid repayment.51 The Bank of England’s directors were ‘trustees of the public’, whose actions had a major effect in and beyond Britain. ‘A large deposit of foreign money in London is now necessary for the business of the world.’ Yet this also meant that a rush to withdraw by foreign individuals, businesses or states could determine ‘whether England shall be solvent or insolvent’.52 The Bank of England would require larger reserves in the light of the vast new scale of British financial commitments and could no longer be governed by an elderly bench of part-timers, drawn from a class of reputable but amateur City merchants.53
The French answer was nationalization. That, obviously, would not pass muster with the English. Such a move also had the demerit of exposing government to criticism in a crisis, or subjecting policy to political pressure, ‘as chance majorities and the strength of parties decide’.54 In an ideal world, he conceded in Lombard Street – with a nervous glance over his shoulder at Wilson – the Bank of England would not even exist. Like any other trade, state meddling harmed the banking business. ‘The best thing undeniably that a Government can do with the Money Market is to let it take care of itself.’ Since it did exist, though, better not to upset markets by any too-radical change. ‘You might as well, or better, try to alter the English monarchy and substitute a republic’, he added archly. Yet the analogy between the function of credit and that of a constitutional monarch was deliberate – and revealing. Bankers had faith in the Bank of England as implicitly as ‘Queen Victoria was obeyed by millions