by James Grant
“Astonishingly rapid now is the progress of society,” the Economist marveled at the start of 1853. “Railroads, electric telegraphs, free trade, the gold discoveries—each of which is enough to have immortalized an age—are all crowded in the space of a boy’s life; what may be the equal or greater discoveries in the next twenty years is not given to us to know. We are only privileged to suppose that they will be equaled or surpassed; and of the wonderful progeny the year that has now begun with great activity will no doubt bring forth its share. We fear no retrogression; but whither the progress is to lead, and where it is to end—except in the bosom of the Almighty, where it began—human imagination cannot conceive.”7
All was well at Stuckey’s, too. Profits hit a new high in the first half of 1853. It fell to the directors to apportion this bounty among the bank’s various constituencies: the balance sheet (in the shape of a larger reserve fund), worthy officers and employees (the heavy volume of business at Bristol and Bath earned the managers of those branches raises of £100 a year), and the stockholders. A payment of £2 a share every six months was the customary Stuckey’s dividend, one the board had adhered to even during the depression of the 1840s. Now that profits were flush, the directors voted a temporary £1 per share bonus. Addressing their fellow owners, they allowed themselves an understated note of self-congratulation: “The proprietors will see from the statement of assets and liabilities now on the table that they have the best grounds for being satisfied with the state of the concern.”
Stuckey’s conducted a conventional banking business with the progressive flourish of a large branch network in its home county of Somerset. The bank took in deposits and issued negotiable notes, that is, currency that bore Stuckey’s own name. The depositors earned 2 percent per annum or so on savings accounts, nothing on checking accounts. Deposits and equity capital were the twin sources of funding. Some banks enhanced their returns by borrowing against their assets at the Bank of England—i.e., “rediscounting,” as that mildly aggressive technique was known. It was not the kind of thing that Stuckey’s did.
Stuckey’s made loans, discounted commercial bills (i.e., farmers’ or merchants’ IOUs, typically of 90 days duration), invested in bonds, and laid up cash in neighboring banks and at the Bank of England. It avoided mortgages, for which there was no liquid market. Loans and discounts yielded in the neighborhood of 5 percent to 6 percent, government bonds half of that.
Vincent Stuckey saw clearly the benefits of decentralized banking within the framework of a tautly managed holding company. Local managers, informed about local circumstances, would make credit decisions; the home office would manage the disparate operations.
There was nothing fancy about those operations. To the millennial banker, heavily taxed and regulated, juggling lines of business in what are broadly termed “financial services,” Stuckey’s may hardly seem like a bank at all. It earned virtually no income outside of the interest it derived from discounts, advances, and fixed-income investments. It did no trading, conducted no arcane hedging or derivatives operations, obtained little income from fees. As for technology, Vincent Stuckey marveled as late as 1841 at how the check, in use since 1659, continued to transform the banking business.§
It is unclear which financial time traveler would be more uncomprehending of the sights at his temporal destination, a Bagehot-era visitor exposed to the regulatory and monetary mores of the twenty-first century or a twenty-first-century visitor set down in the self-regulatory, gold-standard system of the mid-nineteenth century.
Walter Bagehot’s uncle had laid it down that, while bankers were mortal, banks should live in perpetuity. To that end, some capital was essential, and Watson Bagehot, for one, pressed his fellow directors to raise more of it8—that is, visible capital, the funds on the balance sheet. The latent kind, callable in case of emergency, likewise furnished support. There was, of course, no deposit insurance.
Of non-interest-bearing gold and silver, Stuckey’s held the bare minimum. In testimony before a parliamentary committee in 1819, Vincent Stuckey said that he and his bank—and his customers, too—wanted no part of gold coin, prone as it was to fall short of the legal weight and unhandy as it was to transport. As to who should bear the cost of keeping the nation’s store of monetary gold, the banking community was more than happy to cede that unremunerative job to the Bank of England.
In 1846, the monetary commentator Richard Page, signing himself Daniel Hardcastle Jr., drew attention to the paradox behind these ideas. Without gold, there could be no gold standard, an institution the bankers believed in even as they chafed at the obligation to hold the metal itself. Beautiful as it was, it paid them nothing. Far better, for them, to hold credit instruments—bonds, loans, notes—which paid them a great deal and cost them little to store and move. Gold, under the gold standard, had come to resemble the Old Maid in the game of cards:
Every recent improvement in Banking has gone upon the principle that we should retain gold as a standard, but bring it forward as seldom as possible, and scarcely ever touch it. Such improvers would make it “small by degrees, and beautifully less,” until it had vanished altogether . . . They would exceed the art of the modern cabinet-maker, who makes twenty tables out of one log of mahogany which formerly only made one, and goes on veneering and veneering, until it has become a matter of doubt whether there is an inch of solid mahogany in any well-furnished house in London.”9
For fifty years, Hardcastle contended, England had been trying to shift the cost of managing its monetary metal “from one shoulder to another.”10 He had a plan to fix it—as, later on, would the author of Lombard Street.
FOR ALL INTENTS AND purposes, Stuckey’s had nothing to do with the British government. It paid a direct tax of less than 1 percent of its 1853 income. It submitted to no regulatory oversight but that of its auditors and customers. Proof of the trust that the customers reposed in the management was their willingness to hold the notes issued by Stuckey’s itself. An elderly lady once presented herself at a Stuckey’s branch to clean out her account—she had heard that the bank was in trouble. When the teller asked if she would like to be paid in notes of the Bank of England, she replied, “Certainly not,” and demanded the scrip of the bank she had come to leave—Stuckey’s.11 The Stuckey’s financial records give no indication of public refusal of the bank’s currency even in the sweat of a panic. (The ranks of the private banks of issue grew thinner with the passage of time, as the authors of the Bank Charter Act of 1844 intended, and by 1909, when Stuckey’s merged with the larger Parr Bank, the volume of the Stuckey’s note issuance was second only to that of the Bank of England.12)
Attentive to the quality of their assets, the Stuckey’s directors were equally mindful of the solidity of their fellow stockholders. The shares were listed on no stock exchange; you acquired them as you would membership in a club. You might ask to be admitted, though it was better form to wait to be asked—and even Walter Stuckey, a family member, only just made the grade, as he was merely a cashier. The directors reasoned thus: “although much caution should be expressed in admitting cashiers and other clerks to hold shares, it would not be advisable to preclude their doing so by any positive and general rule—that, having regard for Mr. Walter Stuckey’s long and faithful services, and his zeal for the interest of the business, and looking also to the respectability of his family and connections, his admission as a shareholder [should] be approved of.”13
Respectability was the very quality that John and Ann Collier lacked. The brother and sister wanted to invest in Stuckey’s, and their mother made the request on their behalf. The directors refused her because, as they agreed among themselves, reputation was the bedrock of credit. Stockholders had to be “well known in their respective neighborhoods, as persons of property, respectability and fair standing in the class to which they belong.” The Colliers were too young to have earned the requisite position, nor had their mother succeeded in imparting it to them. To grant them permission
to purchase shares would not only tend to “lower the tone of respectability of our proprietary, but lead to the assumption that the directors had no power to reject undesirable persons, or refused to exert it, it would lessen the present reputation of the bank, and would affect its future stability, by creating a disinclination of men of good standing in their respective classes to join it.”14 A hard judgment, but not, after all, a snobbish one. The directors were sorting not by social standing, or even social class, but by character and financial strength.
To sell his or her stock, a Stuckey’s shareholder had to find a suitable buyer, an arrangement that anticipated the protocol and rigmarole of a modern New York City cooperative apartment building. Then again, not many Stuckey’s holders would have wanted to sell: at £60 each, the price offered when Walter Bagehot joined the bank, a share of Stuckey’s delivered an annual dividend yield of 6.67 percent at the regular £4 per share dividend. The Bank of England’s common shares, which did trade in liquid fashion but only with the permission of the directors, were priced to yield in the neighborhood of 3 percent. Stuckey’s was a superlative investment.
The opulence of the second half of 1853 seemed to surprise even the directors. “Notwithstanding the prosperous results of several preceding half years,” the year-end minutes recorded, “that for the half year ended December last is considerably in advance of any former one.” In the first six months, the bank had earned £19,383, in the second half, £24,826,¶ for a combined £44,209. As a return on year-end equity capital, it amounted to 40.4 percent—nowadays, 15 percent is rated excellent. As against year-end assets of £2,103,279, it came to 2.1 percent—1.5 percent at this writing is judged handsome. Counting a second £1 per share bonus, duly declared at year-end, the £6 per share payout delivered a dividend yield of 10 percent—three times what a good bank pays now.
Such returns were astounding. The directors, mindful of both the constructive conservatism of Vincent Stuckey and the panic years of 1825, 1837, and 1847, proceeded to trim sail. From the head office came instructions to boost deposit rates; that is, to check the migration of funds out of the bank and into alternative investments, and to restrict advances and other loans “in the present state of the money market.” The management was of a single mind that trees did not grow to the sky.
At Stuckey’s, as in most institutions, people created problems. Some employees excelled, others disappointed, and a few gave offense. What to do, for instance, about the intemperance of Reynolds Woodland, an officer at Bridgwater, frequently drunk and disruptive, almost as frequently remorseful? Remove him from his managerial position, the board decided, but—in view of his efforts to reform—offer him a clerk’s position at Bristol “at a salary proportional to the position allotted him.” Trouble, too, was the overbearing Mr. Salmon, also of the Bridgwater office, and the hotheaded Mr. Caines, of Wincanton. For each, the directors prescribed a good talking-to.15
Walter Bagehot was two years at his post when the board took up the question of facial hair. Beards had become de rigueur during the Crimean War. They signified manliness, and expressed solidarity with the deployed British troops who wore them for warmth and convenience. Some civilian Englishmen stopped shaving to make a political statement against the unbearded aristocracy who had bungled the management of the war.16
Stuckey’s refused to allow it: “The directors express their decided objection to the wearing of mustaches or beards above the chin by the employees of the company, and request all of them to comply with their wishes in this respect.” The one and only portrait for which Bagehot ever sat shows him fully bearded, possibly in his mid-forties, by which time the war was long over.
ON THE ONE HAND, the chairman’s son missed his London friends. On the other, he was never far from his most steadfast friends, the great writers. Literature was the love of Bagehot’s life, and to share that love he wrote long literary essays; reprinted in books, some of them span thirty pages. Writers can be sorted by their affinity for the act of composition—some like to write, others only to have written—and Bagehot almost certainly belongs in the first happy cohort. His prose has the cadence of brilliant talk; reading him, you wonder how his pen kept up with his mind.
In 1847, when he was twenty-one and completing his master’s degree, Bagehot published his first essay, “Festus,” a critique of a popular poem by Philip James Bailey. The article appeared in the Prospective Review, which, like The Inquirer, served a mainly Unitarian readership. The piece was unsigned, though Bagehot, who had only just earned his bachelor’s degree from the University of London, seems almost a physical presence on the page. The bounding style, youthful piety, moral earnestness, and disdain for fact-checking are Bagehot’s watermarks.**
He judged that the poem, which retold the story of the man who sold his soul to the devil, was worthy to stand in the company of the great Fausts by Marlowe and Goethe. Bailey’s signal shortcoming was his failure to acknowledge the all-important workings of “the Law of Retribution.” Sin demands punishment, a cardinal truth that Bailey had astonishingly “mislaid.” Just as he would in his Paris letters a few years later, Bagehot made a bow to the Catholic Church, either not realizing—or perhaps more likely, realizing full well—how little it would please his non-Catholic readers. He shocked them with a provokingly broad-minded view of the sale of indulgences: he granted there was a certain measure of superstition in paying the Church to effect the early release of a soul from purgatory, “but surely it should come home to the hearts of a money-getting generation, that three centuries ago men were willing to give hard cash to save themselves from the pains of sin. We suspect that a priesthood in [ancient] Greece would have got little by putting up to auction the fee simple of the Elysian fields.” Here was a glimpse of an adult emerging from his university chrysalis.
The young critic condemned Bailey for creating not one, not two, but six love interests for his hero’s enjoyment, a scandal of imaginative promiscuity. Expounding on the necessity of punishment, Bagehot took a swipe at the penal reformer Alexander Maconochie, dismissed as warden of the brutal British prison on Norfolk Island, New South Wales, Australia, for administering fewer beatings than his predecessors. “Only if we can bring it home to the hearts of men,” he wrote, “‘that the wrath of God has been revealed from heaven upon all unrighteousness and ungodliness of men;’ that he has ordained its punishment; that human legislation is but a feeble and coarse endeavor to make his will in this respect be done now as it will be done hereafter—then, and not until then, shall we induce an enlightened and sympathizing people to bear without repining the wholesome severity of just laws.”17 Observant readers, noting that Bagehot had cast a stone at sinners, would have marked him down as a saint or a youth.
In writerly terms, he was not a youth for long. Proof of Bagehot’s early arrival at the age of wisdom is his magnificent essay on “Shakespeare—the Man” in the July 1853 issue of the Prospective Review.
Ostensibly, the purpose of the piece was to review a pair of recent works on Shakespeare’s times and texts, but Bagehot’s real objective was to intuit Shakespeare’s character. In a work of the purest amateurism, the author wrote not one footnote. He scarcely quoted from any book, even the ones he was supposedly reviewing. He didn’t have to: delving into his own deep storehouse of reading, he offers compelling insights about Shakespeare’s personality, drawn from Shakespeare’s writing.
The essay proceeds by quoting the well-worn claim that Shakespeare is a mystery man. (Whether that man might, in reality, have been Francis Bacon, Edward de Vere, the 17th Earl of Oxford, or Christopher Marlowe, Bagehot didn’t choose to address.) Someone writing under that name produced sublime poetry—and that is as far as our knowledge extends. But Bagehot then flicks this contention away: the works themselves constitute a trove of Shakespearean autobiography, he proposes. Only consider some lines from “Venus and Adonis”:
And when thou hast on foot the purblind hare,
Mark the poor wretch, to overshoo
t his troubles,
How he outruns the wind, and with what care
He cranks and crosses, with a thousand doubles:
The many musits through which he goes
Are like a labyrinth to amaze his foes.
It’s absurd, Bagehot goes on, “to say we know nothing about the man who wrote that; we know that he had been after a hare.” The aspiring banker himself chased hares, behind a pack of hounds.
Like Shakespeare’s hare, Bagehot the essayist “cranks and crosses, with a thousand doubles.” Digression follows digression. The reader is like a man lost in beautiful countryside. He doesn’t know where he is or where he’s going, but he’s not unhappy to be there.
“Shakespeare—the Man” takes an early detour from the Bard to the character and physical bearing of François Guizot, the former French premier driven from power in 1848, a historian and author of one of the books ostensibly under review. William Pitt, the long-serving wartime English prime minister, next comes into focus, he and Guizot being examples, Bagehot contends, of the kind of person who experiences nothing and notices nothing of the world around him. Then come Sir Walter Scott and John Milton, each providing contrapuntal insights.
Like Scott but unlike, for instance, Guizot and Pitt, Shakespeare had an “experiencing” nature, Bagehot writes. He loved the world and the world loved him back. Dealing, as the playwright did, with actors, audiences, and the theatrical box office, Shakespeare bore no resemblance to the cloistered literary man, of which Robert Southey was an avatar. “He wrote poetry (as if anybody could) before breakfast,” says Bagehot of the long-serving Poet Laureate, not saying how he came by this intimate information;