Bagehot

by James Grant

  The Economist failed to reckon with the resolution and strength of Abraham Lincoln, who issued the Emancipation Proclamation on September 22, 1862, five days after Union Major General George B. McClellan checked the northern advance of Confederate forces at the Battle of Antietam. It was a controversial measure even within the Lincoln administration. The 1860 Republican platform had pledged only to contain slavery within the states where it existed, not to abolish it, and Lincoln himself was on record as saying that his “paramount object in this struggle is to save the Union.” Freeing the slaves in the rebellious South—though in none of the loyal slaveholding border states—was fraught with risk. The slaves might refuse to work, which is what Lincoln had in mind. But what then? Would their masters not retaliate? Samuel Ward, brother of the poet Julia Ward Howe, author of “The Battle Hymn of the Republic,” and a trusted and astute informant of Secretary of State William H. Seward, warned that the rebel leaders would kill their slaves, just as they had burnt their cotton. The Emancipation Proclamation raised questions strategic, legal, political, and moral. Perhaps the only result it was certain to achieve was intensifying the terrible fury of Southern whites.37

  The news reached London shortly before Gladstone’s ill-advised speech. Pro-Northern elements were jubilant: they had had little sympathy with Lincoln trying to hold together the fragile coalition of anti-slavery radicals, anti-abolition conservatives, and slavery-tolerant, pro-Union border states. Like American abolitionists, they yearned for the moral clarity of a complete, uncompromising break from the pestilential institution of slavery. Editorial comment followed its expected course: Hutton, in the Spectator, regretted that the proclamation did not apply to every state, loyal or rebellious, and to every slave; The Times, sneering at the strategic weakness of the Union cause, imagined blood-soaked reprisals and counter-reprisals between ex-slaves and former masters.

  The emancipation order came as no real surprise. The Economist had anticipated something of the kind in early September. Bagehot was skeptical of what it might accomplish. “Is there, in fact,” he wondered, “any grounds for assuming that, as a body, the negroes would prefer being their own masters with Northern treatment to being cared for and occasionally maltreated by their Confederate owners?”‡‡ He concluded, emphatically: “Our conviction is very strong, that the Southerners will never yield, that the Northerners will never subdue them, that no emancipation policy will materially influence the result.”

  Right or wrong, Bagehot was usually thoughtful, invariably serious. In the October 25 Economist, he sifts the “Meaning and Probable Consequences” of the now published text of Lincoln’s decree. His essay is a model of lucid, taut, deductive reasoning. Journalism schools could assign it to aspiring editorialists to illustrate the myriad ways in which a brilliant and self-confident commentator can err.

  Beginning with an acknowledgment of how little he knew, or could know, about the American war, Bagehot adopts a tone of quasi-omniscience. The Times has no business characterizing Lincoln’s policy as “atrocious,” Bagehot insists. The Economist is rather prepared to settle for a judgment of “dishonest and foolish.” He objects to the Emancipation Proclamation on constitutional grounds—Lincoln had no authority to issue it, even in wartime—and on the grounds of humanity—“To arm savages against your antagonist is to make war like savages, and to descend to the level of savages.”

  Savages? Bagehot clarifies: “The African race are not, as a rule, either bloodthirsty or vindictive. On the contrary, they are patient, most enduring, and usually contented and attached to their employers [sic] and their homes, though lazy and, above all things, not willing to labor unless they are laboring for themselves.” How the editor of a London periodical came by this intimate knowledge of African-American ethnic culture, he does not let on.

  Against the charge of racism it may be said in his defense that Bagehot was impartially contemptuous of the “lower orders” of all races. The educated classes should govern, he believed, although he made an exception of France and, for many years, of the United States. However, his warnings now that the Emancipation Proclamation would sink Americans into still deeper depths of “desperation and ferocity” were ones that many credited, including people in close touch with Lincoln’s own Cabinet.

  “How can a humane man,” Bagehot wondered,

  a thoughtful man, and a just man—and we believe Mr. Lincoln to be naturally all three—have ventured to urge a multitude of ignorant, helpless, excitable Negroes to revolt against their masters, when perfectly aware that he can afford them neither aid nor protection in their outbreak, and that he has been preparing for them only certain discomfiture and cruel punishment? This seems to us the very wantonness of unfeeling selfishness.38

  And two years later, the Economist judged it “undeniable” that

  Mr. Lincoln’s administration has given satisfaction to no one. Its notorious and unprecedented corruption has disgusted the lovers of public purity and decency; its numerous acts of illegal and stupid tyranny have alienated the lovers of liberty and constitutional right; its military incapacity has disgusted all; while its inconsistent, timid, and tentative proceedings on the slavery question have alarmed and offended the Democratic masses, without having given confidence or satisfaction to the hearty abolitionists.”39

  JAMES WILSON’S PAPER WAS a business paper; if Hutton had been unaware of that fact, his successor had absorbed it from the founder himself. What the readers expected, and what Bagehot delivered, was analysis of the financial side of public events, including the American Civil War.

  Interest rates were low and steady in London in early 1863, with long-dated British government securities priced to yield 3.25 percent. It was a good time to dangle a 7 percent coupon before the income-seeking public.

  The Confederate States of America did even better than 7 percent: through the French firm Emile Erlanger & Co., the government in Richmond, Virginia, offered £3 million worth of twenty-year bonds bearing a 7 percent coupon. Priced at 90, i.e., 90 percent of face, or par value, they promised a yield to maturity on the order of 8 percent. Beyond that glittering rate of return, the bonds were exchangeable at par into a pound of cotton at the rate of 6 pence sterling, the equivalent per pound of 12.2 American cents (or, actually, in view of the discounted offering price, at 5½ pence, or 11.1 American cents, per pound). On March 19, as the bonds came to market, cotton in Liverpool fetched 20 pence a pound, or the equivalent of 42.5 American cents.

  A buyer of the Confederate securities could elect to make the exchange for cotton at any time on sixty days’ notice, though he would have to come calling himself for as long as the war dragged on. The cotton would be waiting for him “in the interior” of the Confederacy not more than 10 miles from a railroad or a navigable stream, thence to the ocean, and, perhaps, into the waiting arms of the United States Navy. The Union blockade was by no means impenetrable, but a would-be blockade-runner bore risks that a passive investor in British government debt did not.

  One day, the war would end, possibly in Confederate victory—many in London expected it—or through an armistice brokered by concerned European powers—and not a few in London expected that. If hostilities ended and the Confederacy survived, the bondholder’s cotton would be delivered free of charge to the ports of Charleston, Savannah, Mobile, or New Orleans.

  Applying for bonds, a speculator was obliged to put down only 5 percent of face value. Another 10 percent was due upon allotment, with additional fractional payments of 10 percent or 15 percent falling due on the first of every month from May through October. As of October 1, the £90 pound purchase price would be fully paid.

  Here was an imaginative, options-laden junk bond. Confederate partisans and cotton bulls alike rushed to sign on.§§ In early trading, the securities spurted to a small premium to the offering price.

  How did the Economist appraise this unusual opportunity?

  Bagehot wrote a good analysis whose shortcomings reveal less about his fallibi
lity than the difficulty of financial forecasting.¶¶ He begins by observing that the Confederacy was borrowing money in Europe, “while the Federal Government has been unable to obtain a shilling from that usually liberal and enterprising quarter.”

  He describes the bonds, along with their potential risks. Could the Confederacy deliver enough cotton to satisfy its creditors? Bagehot demonstrates how relatively small the volume of cotton earmarked for the bond-holders—250,000 bales, or one-tenth of annual British cotton imports from those states in a prosperous year. Would the future price of cotton likely rise or fall? Bagehot makes a thorough and plausible case that the price would tend to fall but that 6 pence per pound would likely prove to be the floor. Would the Southern states repudiate this debt, as the state of Mississippi had done with its own in 1841? Unlikely: “No young State, with a character to make and a position to confirm, would commence its national existence by such a shallow and dishonoring blunder.”

  There was, finally, the risk that the Confederacy would lose the war. Nothing to worry about on that score, Bagehot judges: “as our readers know, we should be inclined to estimate very lightly. It is so slight that, of itself, it need not deter any man from sharing in an 8 per cent loan.”

  Yet the price of the cotton bonds was presently sawn in half; by year-end 1863, it had dropped to the low 30s. It rallied with the price of cotton in 1864 only to collapse, along with the Confederacy, in 1865. A flicker of interest persisted for years after the Southern defeat, even after the 1868 passage of the Fourteenth Amendment to the Constitution, which prohibited the United States or any individual state from discharging a debt incurred in the service of the rebellion.40

  FOR FOUR YEARS, Bagehot had predicted a Southern victory. He had argued for the political, if not the moral, equivalency “of the continuance of slavery and the maintenance of the Union.” Both were “injurious to mankind.”41

  In February 1865, nine weeks before Appomattox, rumors of peace swirled in the City of London. Bagehot called them premature: The Confederacy “have still large armies in the field; they have still the ablest generals of the Republic in their ranks,” he said.42 Not until the fall of Richmond did Bagehot confront the fact that the Confederacy was defeated and he was wrong.

  With no acknowledgment of previous error, the Economist saluted the victorious North, adapting Gibbon for the occasion: “panic did not for a moment unnerve the iron courage of the American democracy.” The editor did not linger long on the momentous historical moment, and instead, getting down to business, expertly speculated on the course of postwar prices and trade. In this piece he is measured, intelligent, epigrammatic. Of the complexities introduced by the “present vast and delicate division of labor,” he wrote, “When everybody is working for everybody, everybody is injured by the mischances of everybody.”43

  Persevering readers of the Economist may not have recognized the Abraham Lincoln of Bagehot’s post-assassination eulogy. It was a true and moving, if unexpected, portrait: “Power and responsibility visibly widened his mind and elevated his character. Difficulties, instead of irritating him as they do most men, only increased his reliance on patience; opposition, instead of ulcerating, only made him more tolerant and determined.”44

  A Scottish newspaper of no great pretension had reached much the same conclusion at the end of 1863. “President Lincoln,” declared the Caledonian Mercury of Edinburgh,

  speaks of the attitude assumed toward the United States by European governments without irritation . . . He speaks without acerbity even of the rebels who have done so much to bring calamity upon the country . . . When we recollect the rancorous hate entertained in this country toward the Indian rebels [a reference to the Indian Mutiny of 1857–58] we feel humiliated that this “village attorney,” this “rail splitter from Illinois,” should have shown himself so superior to the mass of monarchical statesmen.45

  Superior to Gladstone, and, no less, to Gladstone’s journalistic confidant, Walter Bagehot.

  * Bagehot produced a fifty-page supplement to the Economist in tribute to its founder. In the early going, Wilson had put out the paper almost single-handedly, while simultaneously contributing to the London Morning Chronicle. “Long afterwards,” Bagehot recounted, “he used to speak of this period as far more exhausting than the most exhausting part of a laborious public life. ‘Our public men,’ he once said, ‘do not know what anxiety means; they have never known what it is to have their own position dependent on their own exertions.’” Walter Bagehot, Memoir of the Right Hon. James Wilson (London: Effingham Wilson, 1861), 23.

  † Gladstone later commented on how Price’s uncompromising ideals contributed to a study of Irish agriculture: “the only man,” he said of Price—“to his credit be it spoken—who has had the resolution to apply, in all their unmitigated authority, the principles of abstract political economy to the people and circumstances of Ireland, exactly as if he had been proposing to legislate for the inhabitants of Saturn or Jupiter.” W. A. S. Hewins, “Price, Bonamy (1807–1888), economist,” Oxford Dictionary of National Biography, 8 February 2018, http://www.oxforddnb.com/view/10.1093/ref:odnb/9780198614128.001.0001/odnb-9780198614128-e-22742.

  ‡ The typical Oxford product, he continues, is the kind of languid critic who reviews a book in the Saturday Review (a stuffy journal to which Bagehot himself sometimes contributed). The book holds that a certain thing is correct, but that thing cannot, in fact, be correct, as the author “does not prove his case; there is one mistake in page 5, and another in page 113.” Not that it matters much from the Oxford perspective. As Ralph Waldo Emerson satirized the Oxonian state of mind—Bagehot now quotes Emerson—“there is nothing true and nothing new, and no matter!” Walter Bagehot, Biographical Studies, 95.

  § The paper made no mention of its editor’s interest in the outcome of the debate. Then again, it would be many years before the ethically sterilizing phrase “to declare an interest” became standard on Fleet Street.

  ¶ In the case of Stuckey’s, as of June 30, 1864, 11 percent of the liabilities comprised notes, 78 percent deposits and other claims.

  ** In financial circles, Mackay is remembered for his 1841 production Extraordinary Popular Delusions and the Madness of Crowds, the story of alchemy, the South Sea Bubble, the tulip-bulb craze, and other such manias. It is cited to this day in opposition to the doctrine that the financial markets are somehow more coolly calculating—more “efficient”—than the people who operate in them. The Times recalled MacKay from his post late in 1863, substituting for him the more objective Antonio Gallenga Turin. “Now and then,” dryly commented Charles Francis Adams, American Minister to the Court of St. James’s, of the change in tone at The Times, “it goes so far as to admit a friendly article, correcting its own views.” Allan Nevins, The War For The Union: The Organized War, 1863-1864, (New York: Charles Scribner’s Sons, 1971), 505-6.

  †† Cairnes, professor of jurisprudence and political economy at Queens College, Galway, and the author of The Slave Power, demolished Bagehot’s argument in a letter to the editor which the Economist gamely printed two weeks later. The next year, Henry Ward Beecher returned to New York from a trip to England and addressed 2,000 of his admirers at the Brooklyn Academy of Music. Cairnes’s name raised a cheer from the crowd when Beecher mentioned him among the many Britons who supported the North. Hutton and the Spectator, too, were named. Bagehot was not. “Mr. Beecher’s Reception in Brooklyn,” New York Tribune, November 20, 1863.

  ‡‡ According to historian Eugene R. Dattel, in 1863–64 there was not much to distinguish slavery on an antebellum plantation, on the one hand, and work for hire under some Northern lessees of Southern plantations, on the other. Former slaves “were not allowed to leave the plantation without a pass.” In 1864, two black wage-earners out of three were defrauded of their pay; they earned $10 a month. Then again, as the historian Adam Rowe observes, defrauding two-thirds of former slaves “still represents an unambiguous improvement for the one-third, an
d, at worst, a wash for the others.” Eugene R. Dattel, “Cotton and the Civil War,” Mississippi History Now, July 2008, http://mshistorynow.mdah.state.ms.us/articles/291/cotton-and-the-civil-war.

  §§ W. E. Gladstone was one of these punters, as were John Thadeus Delane, the editor of The Times; A. J. B. Beresford Hope, proprietor of the Saturday Review; and J. S. Gilliat, a director of the Bank of England. A list of more than 300 English investors was published shortly after the war, producing much embarrassment and recrimination, along with many denials. See John Bigelow, Lest We Forget: Gladstone, Morley and the Confederate Loan of 1863, a rectification, New York: The De Vinne Press, 1905; for the original list of investors, see the John Bigelow correspondence and papers held in the New York Public Library’s Brooke Russell Astor Reading Room for Rare Books and Manuscripts.

  ¶¶ This article from the March 21, 1863, Economist, which bears every mark of Bagehot’s style and intellect, is omitted from The Collected Works.

  CHAPTER 9

  “THEREFORE, WE ENTIRELY APPROVE”

  Toward financial innovation, Bagehot kept an open and receptive mind. Though conservative in his approach to bank credit—as befitted an officer, and, as of 1856, a director, of Stuckey’s Banking Company—he was hospitable to new ideas about finance and central banking alike. Some thought him a heretic.

  One point of controversy was seemingly minute: was it advisable for London depository institutions to pay interest on checking, or demand, accounts? At savings banks, such payment was customary and unobjectionable—the depositors and their funds were presumably committed for the long pull. Stuckey’s, a commercial bank, paid interest on demand deposits which it had reason to believe were at some small risk of being hastily withdrawn. (In forming this judgment, it helped that the managers knew the depositors personally.) Interest on millions of pounds’ worth of impersonal checking, or “floating,” balances—belonging to owners whom the managers of London banks could hardly be expected to know—was another thing, and the City’s banks and bill brokers drew criticism for paying it. The depositors’ money wasn’t just lying around in the vault, but was out on loan or otherwise earning interest—as the depositors would readily discover if they came running for it all at once.