Bagehot on the monopoly central bank (1873)

Walter Bagehot

The British journalist and editor of The Economist magazine Walter Bagehot (1826-1877) points out the “anomalous” and potentially “very dangerous” situation of a government controlled, monopoly central bank but can’t quite bring himself to suggest it be replaced by free competition:

I shall have failed in my purpose if I have not proved that the system of entrusting all our reserve to a single board, like that of the Bank directors, is very anomalous; that it is very dangerous; that its bad consequences, though much felt, have not been fully seen; that they have been obscured by traditional arguments and hidden in the dust of ancient controversies.

But it will be said—What would be better? What other system could there be? We are so accustomed to a system of banking, dependent for its cardinal function on a single bank, that we can hardly conceive of any other. But the natural system—that which would have sprung up if Government had let banking alone—is that of many banks of equal or not altogether unequal size. In all other trades competition brings the traders to a rough approximate equality. In cotton spinning, no single firm far and permanently outstrips the others. There is no tendency to a monarchy in the cotton world; nor, where banking has been left free, is there any tendency to a monarchy in banking either.

Bagehot comes to the reluctant conclusion that a monopoly in a national central bank is both dangerous and counter to the natural operation of the free market. He did not go as far as his friend and colleague James Wilson of The Economist did in advocating competition in the provision of money and banking services (“free banking”) for a variety of reasons. One was that he likened a monopoly central bank to the position of the monarch (like Queen Victoria) and free banking to that of a republican form of government. A monopoly central bank currently existed in Britain and had done so for centuries, as did the monarchy, and to change either would be tantamount to a “revolution” which a sober Victorian gentleman like himself could never contemplate. It would be better in his mind to “(obey)—without doubt, and without reasoning” and not delve too deeply into the legitimacy of either institution.