Search

Walter Bagehot’s contribution to macroeconomics in Lombard Street is misunderstood and underappreciated. To remedy this, I reinterpret his work, including his famous policy “rules,” by piecing together his larger theoretical framework. That framework incorporates: (1) a “Lombard Street” economy, consisting of a permissive lending system, capitalists in need of credit, and a financial center which attracts large inflows of foreign capital; (2) a rigid policy regime built on a gold standard; and (3) a central bank with a dual objective of keeping the nation’s currency convertible into gold and backstopping a crisis-prone economy. Bagehot argues that an economy with this structure is vulnerable to two distinct crises. The first is a speculative attack on the gold standard by foreigners, as they seek to convert their money into gold. And the second is a run on the credit system by nervous participants. Guided by the “right principles,” Bagehot insists that an active central bank can both preserve the gold standard and prevent recurrent financial panics. JEL Classifications: B31, E58, N23

In part 5 of the third volume of Capital, Marx analyzed the relationship between the monetary and credit systems in mid-nineteenth-century England. He argued this relationship shaped the complex form that crises took in 1847, 1857, and 1867, as well as the contradictory role and effectiveness of the Bank of England in managing those crises.

This paper focuses on integrating Marx’s theory of real and financial crises into a theory of complex crises. I argue that in part V of the third volume of Capital, what Engels referred to as Marx’s “disorderly mass of notes” on credit, Marx had the beginnings of a concrete analysis of the three panics—1847, 1857, and 1866—which wreaked havoc in mid-nineteenth century Britain. He argued that the relationship between the real economy, the rules of the game of the mid-nineteenth century gold standard, and the emerging credit system shaped the complex nature of the era’s downturns, as well as the contradictory role and relative effectiveness of the Bank of England in managing the era’s periodical outbreaks of financial disorder.