Bagehot
Page 5
In 1840, Wilson’s pamphlet went into a second and third edition, and Sir Robert Peel quoted from it in the House of Commons. The newly-minted controversialist earned his highest praise from a pamphleteer who attacked the free-trade champions by name and by argument. The protectionist devoted three pages to one author, five to another, nine to a third, fifty-three to a fourth—and 114 to Wilson.9
Writing came hard to Wilson. He knew full well what he wanted to say; at first, he just couldn’t say it. No one was more certain than he of the tenets of laissez-faire economics, of which free trade was a logical outgrowth. Wilson achieved journalistic fluency through hard practice: “the only source of certain success, whatever the undertaking may be, is steady, well directed and unremitting assiduity,” he wrote.10 He practiced in the columns of the Manchester Guardian, a Scottish newspaper or two, and the Examiner, a crusading weekly owned and edited by the celebrated journalist Albany Fortesque. Eventually, the sentences came so easily to Wilson that Fortesque was obliged to take scissors to Wilson’s copy. The columnist chafed at the editing and resolved to do something about it: he would start a free-trade paper of his own.
What the mother of his young daughters—by 1841, there were six—thought of that scheme is unrecorded. The capital of the cash-strapped Wilson now consisted of knowledge, character, and his all-too commodious houses. To get ready money, he moved his family to London, reduced the staff of that residence to two, and rented the place in Dulwich. Having raised £800 in this fashion, he borrowed another £500. By late June 1844 he thought he could see the future. “I think,” he wrote to Elizabeth, “with my great fund of commercial and statistical matter and very original articles on Free Trade and Political Economy, there is no danger but a good and attractive paper may be made. You know the facility with which I write on all these subjects, and with weekly practice that facility will increase, and my style will improve, although it is considered extremely good, clear and effective for such subjects at present.” His paper would be “perfectly philosophical, steady and moderate;—nothing but pure principles.”11 The Economist,‡ he called it; vol. 1, no. 1 appeared on September 2, 1843.
BAGEHOT WAS AWARE OF these boiling public controversies;§ he and his friends talked them to death. They heard the Chartist agitators flay the capitalists, and the Anti-Corn Law orators assail the protectionists. One evening in 1844, at Covent Garden Theatre, they heard Daniel O’Connell, the great Irish orator, mesmerize a houseful of Anti-Corn Law partisans. On the same occasion, they listened to the politely received remarks of James Wilson on the universal blessing of free trade.12
For a day or two, Bagehot could think of nothing but the spectacle and the speech-making. Then he thought of the crowds that had walked right by the theater. They apparently had something more important to do: “I had hardly ever so distinct a notion of the greatness of London, as when I came out, and saw how little interest all this great assemblage seemed to excite three streets off, and how little effect it had on either the numbers or direction of the throng of passengers.”13
In Walter Bagehot, there was no gentlemanly fear of conveying scholarly effort. He reveled in reading and writing. Often falling asleep with his pen in his hand, he awoke like a stiff old man. He did fear failure, and so dreaded the exams at which he finally and predictably excelled. Stricken with some malady in the summer of 1843, he skipped the autumn term to rest and recover on horseback in Langport, where a private tutorial in practical banking awaited him. A young clerk at the Stuckey’s branch in the east Somerset town of Frome had made off with £420, covering his tracks with fake book entries. The sum was shockingly large, even if it failed to dent the bank’s net worth of £126,000. What shook the confidence of the senior officers was that they were so long in the dark. The finance committee, on which Watson Bagehot sat, had failed to spot it.¶
His health restored, Bagehot returned to London in 1844, quickly making the acquaintance of the litterateur, diarist, lawyer, Peninsular War Times correspondent, and inveterate networker Crabbe Robinson. A bachelor in his sixties, Robinson hosted famous literary breakfasts with good talk but no breakfast. Literature, for Bagehot, was a pleasure as much as a duty, and he distinguished himself in the University College debate society. Once he spoke to the topic of “Whether Government ought to interfere with the dissemination of blasphemous or seditious publications.” He couched his reply—it was in the negative—in arguments so tightly wound and in authorities so apt that his speech would have done credit to an MP in the House of Commons. Reminiscing several years after graduation, Bagehot wrote that in his mind, the core of one’s education consists
not in tutors or lectures or in books “got up,” but in Wordsworth and Shelley; in the books that all read because all like—in what all talk of because all are interested—in the argumentative walk or the disputatious lounge—in the impact of young thought upon young thought, of fresh thought on fresh thought—of hot thought on hot thought—in mirth and refutation—in ridicule and laughter—for these are the free play of the natural mind, and these cannot be got without a college.14
Travel, too, was in the teenager’s curriculum. On a tour of the Continent in the summer of 1844 with his aunt and uncle Reynolds, Bagehot marveled at the beauty of the Catholic Church. “[As] I tried to enter into the conception of the painter, the tears came too fast to my eyes to let me look any longer,” he reported of a devotional painting at the Antwerp Museum. As for a statue of Jesus and the Virgin, attributed to Michelangelo, in the Cathedral of Notre Dame, Bagehot could find no words to describe its beauty. Yet how curious it was, the Protestant youth reflected, that these great achievements of the human mind “should be at the service of a system, which sets with denying the right of private judgment in matters of religion—that is, the right of exercising the highest of its powers on the noblest of subjects.”15
It was a sore point with his mother that her young genius had his head in the clouds. He had always chosen the most difficult coursework in school, though his spelling, for all his learning, was barbarous. The work had taxed his health—his delicate chest recalled the “hereditary consumption” on her mother’s side. Then, too, she observed, “many a mathematician is certainly a learned booby.”
Bagehot had been contemplating a career in the law, but his mother pressed him to return to the family bank instead. “[T]urn your attention a little to business when you are home,” she wrote him in 1845, his twentieth year:
try to understand Papa’s cleverness in it, and if very or totally inferior at first, do not be depressed. If he were to die now, which God forbid! I am sure I should at once wish you to understand what business is. I have often told dearest Papa, it was a fault more of his habits than his intentions, that he had not, as a matter of course, made you better acquainted with its practical details and mysteries; but all paths are open to good sense, good feelings, good intentions and industry, and, as deep and abstract study is now so bad for you, you must seek to apply the stores already acquired in lighter converse and associates, and in more of the practical details, friendships and usages of daily life, and not be so much of the studious, mawkish scholar any longer.16
Yet in November 1846, Bagehot astonished himself, if no one else, by securing first class honors in his final examination and becoming a Bachelor of Arts. It seemed he would become a lawyer after all.
Preparation for this career entailed a program of directed reading and clerical drudgery in one of London’s four Inns of Court. Preceding all would be two years of study to earn an MA, also at University College. In February 1847, the newly-minted college graduate secured rooms for himself at No. 6 Great Coram Street—a nice, quiet street, full of nice, unassuming houses. Thackeray’s Mr. Todd lived there in the pages of Vanity Fair.17
Elsewhere in London, statesmen clashed. Britain’s serial monetary and banking upheavals set up a cry for reform. Restoration of the gold standard in 1821 had solved some of the problems with paper currency, but it had not procured peace
and quiet, let alone unchecked prosperity. Something about British finance seemed to need fixing: Peel’s government focused first on the stock market, second on the Bank of England.
In 1841, a committee of the House of Commons investigated the phenomenon of joint-stock companies. Its report, three years in the making, was produced under the guiding hand of the demonically energetic William E. Gladstone, the thirty-one-year-old vice president of Peel’s Board of Trade. Readers bypassed the dry legal preface for the true-crime taxonomy of shady dealing, invitingly entitled “Modes of Deception.” Gladstone proposed a law to streamline the process of incorporating a business. No more would an entrepreneur have to seek a royal charter or a private act of Parliament; he could pay £5 to a government registrar instead. A requirement to disclose essential corporate information would protect the investing public against fraud. Gladstone’s labors bore fruit in the Joint Stock Companies Act of September 1844. “The principle of non-interference has its limits,” applauded Law Magazine.18
The Bank Charter Act, also enacted in 1844, was the Peel government’s attempt to fortify the pound by controlling the issuance of bank notes. Peel’s Act, as the landmark law was also known, centralized monetary power in the Bank of England, even as it sundered the Bank in two. The Issue Department would emit notes in a predictable and semi-mechanical fashion, every pound of issuance above £14 million to be matched by its equivalent in gold in the Bank’s vaults. As to banks like Stuckey’s, their note-issuing powers would be circumscribed, while note issuance by new provincial banks would be prohibited. The Banking Department, the Issue Department’s fraternal twin, would take deposits and make loans, much like any other London bank. No more would it operate chiefly in the nation’s interest. It would, rather, be managed in the interest of the stockholders.**
Assure the gold value of the paper, control the issuance of pound notes by the country banks, and all would be well, reasoned the authors of what was intended to be—and what indeed proved to be—the most significant banking legislation of the Victorian age.
•••
A BANKER’S SON WOULD not have failed to notice that a great bull market†† was raging in railroad shares. The punters’ roll call—the official roster of people who had committed to buying railroad shares—included 157 members of Parliament, 257 clergymen, and two and a half pages’ worth of people named Smith. By 1845, 20,000 Britons had subscribed £2,000 or more to purchase railroad equities. Perhaps not many of these individuals had the cash needed to pay full value for their subscriptions, but they didn’t have to stump up the funds—so little was initially required. Calls for additional capital would come after business plans were successfully translated into action. Pending that rendezvous with reality, the price of the “scrip”—as in subscription—bounded higher.
Rarely before or since have so many speculative stars been so perfectly aligned as they were for the railway mania of the mid-1840s. Harvests were plentiful and money was cheap. Steam power and the telegraph were technologies just as wondrous as the promoters avowed them to be: horse-drawn coaches, even while zipping along on Macadam’s newly paved roads, averaged no more than five miles an hour, while George Stephenson’s steam locomotives were achieving speeds of fifteen miles an hour. Messages moved still faster on the humming wires of the telegraph: in 1844, The Times was on the streets of London with news of the birth of Queen Victoria’s second son, Alfred Ernest, within forty minutes of the royal announcement. For this journalistic feat, the editors credited “the extraordinary power of the Electro-Magnetic Telegraph.”
Visionaries invited the earthbound to imagine how the railways would draw nations together in trade. Cities would be emptied of surplus populations, the liberated excess happily resettled as commuters in the now accessible suburbs. The railway era would be one of redrawn maps, of thriving new businesses, and of vaulting real estate values. And really, how could nations wage war in a world so intimately twined as theirs would shortly be?
Neither would a banker’s son have failed to mark a steep decline in interest rates, nor the Bank of England’s role in bringing them down. Standard doctrine held that the Bank’s administered rate should hover slightly above the rates that private actors agreed to accept in the open market. Yet, from the passage of Peel’s Act through the end of 1846, market rates averaged 3.24 percent, the Bank’s rate, 2.93 percent.19 Low interest rates were not the Bank’s only contribution to the speculative frenzy. With the new commercial latitude that Peel’s Act accorded to it, the Old Lady lent more freely than she had previously done, at longer maturities and against a more eclectic range of collateral. And to supplement her holdings of government securities, the Bank purchased railroad debentures (not mortgages but unsecured loans), a lapse of judgment that a committee of the House of Lords would later condemn for giving “a high sanction and an effective stimulus” to a stock market that needed no official encouragement.20
The first railroad bubble was a kind of starter, warm-up mania. It popped in 1837, and burnt investors did not immediately return to the market to duplicate their errors in a new upswing, though the railroads lived up to their operational billing by earning a profit in the economically depressed years that followed the bust.21 A bigger and gaudier boom was in full swing by 1844. In previous bull markets, promoters might float a few hundred new companies; more than 450 joint-stock railroad lines entered their names in Gladstone’s company registry in the single month of September 1845. Honest and crooked promoters both judged the £5 registration fee eminently manageable.22
Sober observers thought it strange that the shares of nine or ten competing lines could each appreciate, though only one would win the coveted right of way. “It will be a matter of marvel and pain to discover the universality of the character of this speculation,” prophesied Wilson’s Economist—by now producing its own nine-page “Railway Monitor”—about the certain denouement. “From domestic servants, footmen, and butlers, to titled spinsters and church dignitaries, running through all ranks and professions, the suffering will be more general than on any former occasion. It will be like a universal domestic affliction.”23
Still, by the end of October 1845, more than 1,200 railway companies were on the drawing boards with an aggregate projected cost of more than £560 million, a sum of money slightly greater than the national income of the time. Promoters were floating a dozen new schemes a week.24 Logic makes as poor an argument against a boom as it does against a love affair. A measure of the intensity of the speculators’ ardor was their willingness to pay borrowing costs of as high as 80 percent25 at a time when the Bank of England, lending against first-class commercial bills, charged 2.5 percent.
The boom was cresting as Bagehot entered the home stretch of his undergraduate studies. Share prices came under pressure late in 1845 as railroads began to call for actual capital from their not always liquid, committed, or well-endowed scrip-holders. Some £40 million was thus summoned in 1846. Not all of it obediently appeared.
These were real demands on scarce resources: “As construction got under way,” related the historian Edward Chancellor, “money was diverted from the normal channels of business to pay for land, iron, timber and, above all, labor. These costs had to be shouldered by railway speculators, who were forced to reduce their employment of domestic servants, consumption of wine and sporting activities in order to meet their ongoing railway calls.”26 In January 1847, a short harvest and drain of gold pushed the Bank of England to raise its discount rate to 4 percent from 3.5 percent. Railway capital calls continued, to the tune of £5 million a month.27 In the upswing, credit had been available at a price, even if a usurious one. It was available no more. In March, depositors staged a run on the Stuckey’s branch in Bath: “constant, and at times severe, pressure” now characterized the money market, as the directors of the Bagehot family bank were apprised in April.
Well did the Stuckey’s directors know it. The embarrassment at Bath, at least one of their number believed, was t
raceable to their own credit policies. Vincent Stuckey had died in 1845 at the age of seventy-four. When he was running things, the first words spoken—or, at least, recorded—at directors’ meetings were the price of gold and the state of the foreign exchanges. It is unlikely that Stuckey would have ignored the flapping red signal pennants of 1847, and an entry in the directors’ minute book in April of that year rebuked the board for its inattention. The expansive course of Stuckey’s Banking Company “is much to be regretted,” wrote the anonymous critic, almost certainly a fellow director, “being contrary to the example set by the stringent course adapted at present by the Bank of England and by all the London Bankers, as well as being contrary to right principles.”28
IT BOOSTED NO ONE’S confidence, in August, to learn of the failure of thirteen grain merchants, including the firm led by none other than the governor of the Bank of England, W. R. Robinson.29 This plague of bankruptcies, a knowledgeable contemporary recorded in October, went “beyond all precedent in the commercial history of the country.” Now the Bank itself was in trouble: low on gold, it refused to lend even against public securities, the prices of which duly plunged. On October 23, a deputation of City merchants and bankers implored the chancellor of the exchequer to suspend the restrictions on the Bank’s issuance of notes that Peel’s Act had imposed only three years before. The chancellor assented, the Bank resumed its lending, and the panic stopped in its tracks.
James Wilson now allowed himself the pleasure of reminding his readers how right the Economist had been. It had warned against the railroad mania and against the government’s attempt to regulate it; Gladstone’s registration protocols provided no protection against fraud and, by seeming to lend official approval to any and every railroad promotion, arguably facilitated crooked dealing.30