Lombard Street: A Description of the Money Market

by Walter Bagehot

The mass of the Bank directors are merchants of experience, employing a considerable capital in trades in which they have been brought up, and with which they are well acquainted. Many of them have information as to the present course of trade, and as to the character and wealth of merchants, which is most valuable, or rather is all but invaluable, to the Bank. Many of them, too, are quiet, serious men, who, by habit and nature, watch with some kind of care every kind of business in which they are engaged, and give an anxious opinion on it. Most of them have a good deal of leisure, for the life of a man of business who employs only his own capital, and employs it nearly always in the same way, is by no means fully employed. Hardly any capital is enough to employ the principal partner's time, and if such a man is very busy, it is a sign of something wrong. Either he is working at detail, which subordinates would do better, and which he had better leave alone, or he is engaged in too many speculations, is incurring more liabilities than his capital will bear, and so may be ruined. In consequence, every commercial city abounds in men who have great business ability and experience, who are not fully occupied, who wish to be occupied, and who are very glad to become directors of public companies in order to be occupied. The direction of the Bank of England has, for many generations, been composed of such men.

Such a government for a joint stock company is very good if its essential nature be attended to, and very bad if that nature be not attended to. That government is composed of men with a high average of general good sense, with an excellent knowledge of business in general, but without any special knowledge of the particular business in which they are engaged. Ordinarily, in joint stock banks and companies this deficiency is cured by the selection of a manager of the company, who has been specially trained to that particular trade, and who engages to devote all his experience and all his ability to the affairs of the company. The directors, and often a select committee of them more especially, consult with the manager, and after hearing what he has to say, decide on the affairs of the company. There is in all ordinary joint stock companies a fixed executive specially skilled, and a somewhat varying council not specially skilled. The fixed manager ensures continuity and experience in the management, and a good board of directors ensures general wisdom.

But in the Bank of England there is no fixed executive. The Governor and Deputy-Governor, who form that executive, change every two years. I believe, indeed, that such was not the original intention of the founders. In the old days of few and great privileged companies, the chairman, though periodically elected, was practically permanent so long as his policy was popular. He was the head of the ministry, and ordinarily did not change unless the opposition came in. But this idea has no present relation to the constitution of the Bank of England. At present, the Governor and Deputy-Governor almost always change at the end of two years; the case of any longer occupation of the chair is so very rare, that it need not be taken account of. And the Governor and Deputy-Governor of the Bank cannot well be shadows. They are expected to be constantly present; to see all applicants for advances out of the ordinary routine; to carry on the almost continuous correspondence between the Bank and its largest customer—the Government; to bring all necessary matters before the board of directors or the Committee of Treasury, in a word, to do very much of what falls to the lot of the manager in most companies. Under this shifting chief executive, there are indeed very valuable heads of departments. The head of the Discount Department is especially required to be a man of ability and experience. But these officers are essentially subordinate; no one of them is like the general manager of an ordinary bank—the head of all action. The perpetually present executive—the Governor and Deputy-Governor—make it impossible that any subordinate should have that position. A really able and active-minded Governor, being required to sit all day in the bank, in fact does, and can hardly help doing, its principal business.

In theory, nothing can be worse than this government for a bank a shifting executive; a board of directors chosen too young for it to be known whether they are able; a committee of management, in which seniority is the necessary qualification, and old age the common result; and no trained bankers anywhere.

Even if the Bank of England were an ordinary bank, such a constitution would be insufficient; but its inadequacy is greater, and the consequences of that inadequacy far worse, because of its greater functions. The Bank of England has to keep the sole banking reserve of the country; has to keep it through all changes of the money market, and all turns of the Exchanges; has to decide on the instant in a panic what sort of advances should be made, to what amounts, and for what dates; and yet it has a constitution plainly defective. So far the government of the Bank of England being better than that of any other bank—as it ought to be, considering that its functions are much harder and graver—any one would be laughed at who proposed it as a model for the government of a new bank; and that government, if it were so proposed, would on all hands be called old-fashioned, and curious.

As was natural, the effects—good and evil—of its constitution are to be seen in every part of the Bank's history. On one vital point the Bank's management has been excellent. It has done perhaps less 'bad business,' certainly less very bad business, than any bank of the same size and the same age. In all its history I do not know that its name has ever been connected with a single large and discreditable bad debt. There has never been a suspicion that it was 'worked' for the benefit of any one man, or any combination of men. The great respectability of the directors, and the steady attention many of them have always given the business of the Bank, have kept it entirely free from anything dishonorable and discreditable. Steady merchants collected in council are an admirable judge of bills and securities. They always know the questionable standing of dangerous persons; they are quick to note the smallest signs of corrupt transactions; and no sophistry will persuade the best of them out of their good instincts. You could not have made the directors of the Bank of England do the sort of business which 'Overends' at last did, except by a moral miracle—except by changing their nature. And the fatal career of the Bank of the United States would, under their management, have been equally impossible. Of the ultimate solvency of the Bank of England, or of the eventual safety of its vast capital, even at the worst periods of its history, there has not been the least doubt.

But nevertheless, as we have seen, the policy of the Bank has frequently been deplorable, and at such times the defects of its government have aggravated if not caused its calamities.

In truth the executive of the Bank of England is now much such as the executive of a public department of the Foreign Office or the Home Office would be in which there was no responsible permanent head. In these departments of Government, the actual chief changes nearly, though not quite, as often as the Governor of the Bank of England. The Parliamentary Under-Secretary—the Deputy-Governor, so to speak, of that office—changes nearly as often. And if the administration solely, or in its details, depended on these two, it would stop. New men could not carry it on with vigour and efficiency; indeed they could not carry it on at all. But, in fact, they are assisted by a permanent Under-Secretary, who manages all the routine business, who is the depository of the secrets of the office, who embodies its traditions, who is the hyphen between changing administrations. In consequence of this assistance, the continuous business of the department is, for the most part, managed sufficiently well, notwithstanding frequent changes in the heads of administration. And it is only by such assistance that such business could be so managed. The present administration of the Bank is an attempt to manage a great, a growing, and a permanently continuous business without an adequate permanent element, and a competent connecting link.

In answer, it may be said that the duties which press on the Governor and Deputy-Governor of the Bank are not so great or so urgent as those which press upon the heads of official departments. And perhaps, in point of mere labour, the Governor of the Bank has the advantage. Banking never ought to be an exceedingly laborious trade. There must be a great want of system and a great deficiency in skilled assistance if extreme labour is thrown upon the chief. But in importance, the functions of the head of the Bank rank as high as those of any department. The cash reserve of the country is as precious a deposit as any set of men can have the care of. And the difficulty of dealing with a panic (as the administration of the Bank is forced to deal with it) is perhaps a more formidable instant difficulty than presses upon any single minister. At any rate, it comes more suddenly, and must be dealt with more immediately, than most comparable difficulties; and the judgment, the nerve, and the vigour needful to deal with it are plainly rare and great.

The natural remedy would be to appoint a permanent Governor of the Bank. Nor, as I have said, can there be much doubt that such was the intention of its founders. All the old companies which have their beginning in the seventeenth century had the same constitution, and those of them which have lingered down to our time retain it. The Hudson's Bay Company, the South Sea Company, the East India Company, were all founded with a sort of sovereign executive, intended to be permanent, and intended to be efficient. This is, indeed, the most natural mode of forming a company in the minds of those to whom companies are new. Such persons will have always seen business transacted a good deal despotically; they will have learnt the value of prompt decision and of consistent policy; they will have often seen that business is best managed when those who are conducting it could scarcely justify the course they are pursuing by distinct argument which others could understand. All 'city' people make their money by investments, for which there are often good argumentative reasons; but they would hardly ever be able, if required before a Parliamentary committee, to state those reasons. They have become used to act on them without distinctly analysing them, and, in a monarchical way, with continued success only as a test of their goodness. Naturally such persons, when proceeding to form a company, make it upon the model of that which they have been used to see successful. They provide for the executive first and above all things. How much this was in the minds of the founders of the Bank of England may be judged of by the name which they gave it. Its corporate name is the 'Governor and Company of the Bank of England.' So important did the founders think the executive that they mentioned it distinctly, and mentioned it first.