Interview With Author James Grant
For those in our readership who don’t know who Bagehot is, how would you describe him, who is he?
He was an important figure in 19th century English finance and journalism. He was the editor of the Economist. It was a very small weekly journal that circulated almost entirely in the UK and very largely within the city of London. So, he edited Economist magazine. He wrote, for the sheer pleasure of it, on literature and on politics for the highbrow courtly journals of the day. And he was also a banker; he came from a family that was involved and held a very substantial ownership interest in a flourishing bank in the English west countries. So those were the three things he was known for.
As you write in your book, Bagehot was very influential on many successive British governments. Do you think it’s healthy for one individual to have that much influence on a government’s economic policy?
He was a great admirer and confidant of William B. Gladstone, who had a long and brilliant career in the highest reaches of English politics. One of Bagehot’s earlier biographers titled his book The Spare Chancellor. The Chancellor is the equivalent in England of the Secretary of the Treasury in America. Bagehot was described by some as a counselor to the high finance officials in all the English governments, whether they be liberal or not. He did wield some influence, but I don’t know if it was an unhealthy influence. The only question I think might be raised about his engagement with authority is that in his position as a stockholder and an officeholder in a commercial bank. A second consideration what today we regard as journalistic ethics - can you, as a supposedly impartial journalist, take aside your politics. He was an avowed exponent of the liberal party.
When it comes to politics, Bagehot took a position of “animated moderation.” What does that mean, and where do we see remaining vestiges of his ideologies in today’s politics?
Animated moderation was his notion of being sensible and not extreme. He had very little patience with those who would take a highly ideological line that did not fit in with the practical agenda of the time. He was an establishmentarian and believed in things as they were. In america of course the idea of moderation is now a quaint one. The democratic party is seemingly being drawn left away from the center out of a reaction to a certain resident of 1600 Pennsylvania Avenue in Washington DC. Politics in this country are edgy and stringent, and moderation seems to be in short supply. And much the same could be said for britain, because British populist electorate have drawn daggers, over the contentious issue of brexit. Animated moderation is not the same today. Bagehot perhaps would be shocked to see how embittered modern politics has become.
Back in those days, what would be considered liberal economic policies vs conservative vs moderate?
A conservative policy might have been one that favored the landowners in England. And such a policy would have meant the erection of tariff protections that would have made imported grain much costlier. A great battle was fought over that in the 1840s having to do what was then called the corn laws. Forces of the tory, the conservative tory, argued strenuously that the land-owning interests in England deserved protection and were the backbone of the country. Liberals insisted on something like a free bargain. They were the party of free trade and of the ideas we associate now with Adam Smith. Those are the two pulls that were defined political economy at the time. Those who loosen governmental controls over enterprise versus those who mobilize government for the protection of certain interests on the other.
When we talk about how economic policy evolves over time, what do you think were the biggest turning points in the way economic policy was crafted?
I think the very dramatic parliamentary vote to overturn these corn laws in the 1840s was among the most dramatic. It led Britain into being sort of the champion of free trade throughout the world, and it created a great deal of prosperity for English economy. Another important juncture in economic policy concerns the nature of money and the organization of a banking system. Persistent questions in economics has to do with: what’s money, and who says so? Pieces of paper stamped with an image of the ruler or the sovereign? What imbues it with value? Or is something such as gold or silver coin, they pass for money, because people accept them out of conviction that they can’t be counterfeited. Britain went through a long debate about the nature of money during the early part of the 1800s. It came to be decided that gold and silver were money, and Bagehot believed that himself. He said that the only money is gold and silver coin, and the paper representation, is merely a promise to pay those precious metals.
Do you think there are any better economic standards than the gold standard? If so what are they, and if not, why do you think so?
The system in place today is a very different than the gold system. It’s a system that has its basis in the government’s right to call something money. That piece of paper in your pocket of which you can’t get enough - is money. For several reasons: one is that we have come as a society to accept it as such. It’s social consent. A more legalistic reason that imbues money with value is the government accepts it in payment of taxes. While the dollar bill could be duplicated, it is a valuable thing. It’s worth what it says on its face because, you can use it to pay your not insubstantial taxes. Now these notions of the source of value in money, are relatively new in the context of world history. As recently as 1971, the dollar drew its value, certainly in international affairs, from the promise of the treasury to exchange 35 one-dollar bills for an ounce of gold. The dollar was defined as a weight of gold or silver. The world has basically put the gold standard out of mind. I dissent from that, but the verdict of the world says otherwise.
Why do you dissent from that idea?
If the government can create money, the temptation is ever present, and irresistible, to create too much of it. The government has a choice. We could create money in a moderate and measured way and raise the rest of what we needed by taxing the people, or we could not tax them so much, print a lot of money, and spend that. The verdict throughout history is that governments, when presented with those choices, will invariably choose the one of overprinting money at their disposal. Previous experiments in the system have ended in tears, inflation, distortions, and monetary turmoil. I am of the view that that is our fate as well. I see evidence that the ease of creating money itself creates irresistible temptation to overdo it.
On the topic of the government printing money, what’s the role of the government in the economy, through fiscal and monetary policy, and how is our understanding of that role of the government changed in the 20th and 21st century?
Let’s go back to the 1800s, the 19th century when Bagehot was doing business. In that time, it was truly a minimalist government. He ran a bank, and never saw a bank of england. The bank’s earnings were untaxed, but it was a minor imposition on the people’s earnings. Police force was in most places invisible if it did exist at all. It was a society run on the governmental shoestring. The power of the state was wielded in foreign affairs, domestic matters, but certainly for the most part in economic affairs. What over the course of time has led to more government involvement? it’s war. Now we’re entering the 20th century and we’re going to 1914, the start of world war one. In 1913, the congress enacted the 16th amendment, the income tax amendment, which gave congress the power to tax people to letting tariffs to imported products. When the income tax was passed. A year later began World War 1 in Europe and two years later in 1917 American anarchists. By 1918 the income tax, the range of taxation has gone up from 5 or 10% to 80 or 90% at the top levels of income. It took a few years of war to utterly change the nature of American taxation, but also for social purposes which truly came to pass in the 1930s. In a few decades, the presence and the power of the American government and economic affairs vastly expanded. In the 1930s, the government took on jobs that nobody ever imagined it would undertake. These changes came along very quickly and have in lifetimes since probably your grandparents and great grandparents.
So just going back to Bagehot a little bit, what do you think Bagehot’s main contributions are to financial theory and are his ideas still applicable in todays’ economy?
He was not a theorist; he was a journalist. I’m here to tell you that journalists are not necessarily the deepest of theoretical thinkers, I speak as one. But Bagehot is best remembered in international matters for his doctrine about what the central bank like the federal reserves or the Bank of England, how such an institution ought to react about when stock markets crashed or when the economy got into a slump or when depositors at banks lost faith in those institutions and ran for their deposits to withdraw them. That’s what he thought about, and he decided that in those perilous times, in those times of crisis, the central bank ought to intervene, and ought to offer loans to anyone who wants one and put to collateral leaning, anyone who could reasonably expect to pay the loan back because they had something to offer in exchange. They saw the clarity of the ideas and remembered the details because Bagehot was such a catchy writer. His power as an author gave these ideas a velocity or a trajectory that they perhaps otherwise might’ve not had. And these ideas he carried well into our time. So his contributions were not princely theoretical, they were descriptive, he describes how things worked and he lent a way to his journalist power, and that way as I said was for the central banks to be much more active and to declare themselves to be more active. So that when there’s a crisis people do enter the market and try to make things better. The trouble with that is that if you know the central banks is going to be there for you, as if were to have your back, if you are a big financial person you are likely to take more risk with your money because the central bank has promised you. There’s a term for this, it’s called borrow hazard and that’s the problem with the assurance that someone will be there to mop up and to set things right. At the time people resisted Bagehot’s ideas, there’s an issue, if you say these things, if the central bank does these things, all the bad actors will be that much worse and we will all bear the cost of bailing them out, and that’s kind of what happened.
Okay so, thinking more about like recent times, what do you think is the most successful economic policy in the last 50 years of American government, and why. Also, what do you think is the least successful policy?
Well I would say that among the most successful policies, is the deregulatory movement in the 1970s under Jimmy Carter, which continued in the 1980s under Ronald Reagan. it simply means the rewriting of rules allowing people to compete to bring down prices for the benefit of consumers and to bring the benefit of a lower rate of inflation. Under Jimmy Carter, airline ticket prices came down because the Carter people were successful at putting through the deregulatory rules and allowed newcomers in the airline business to compete. Thereby shaking things up and allowing many more people to travel at lower prices. This particular set of good ideas in my opinion was not the doing of one singular partition effort, it was a joint realization that the economy was too rigid, it was too shackled by laws and rules and they always wanted the invitation for enterprising people to do the same thing as established people were doing, but by doing it better and cheaper. That drive to deregulate has at intervals continued to this day. Sometimes it’s a pendulum, but now we see the need to tighten things up and to keep out some of these newcomers. There are movements back and forth to regulate and to undo these regulations. Under president Trump we have had a period of undoing regulations, not all of them for any means, but for the most part so I would call that a very good thing, that would be a longstanding, intermittent policy and on the other side I would call price controls one of the very worst things. They were instituted again in the 1970s, a time of great ferment because of the inflation. Price controls, a policy by the federal government gave the government the authority to tell people you may not charge 5 dollars for this particular hot dog, you must charge one dollar and 95 cents. In 1971 under republicans, the government arrogated to itself a policy to set a ceiling on wages and prices. The price mechanism is a magical institution, the ear play of supply and demand. Have you ever wondered why in a market they kind of don’t run out of things, well it’s because they know how much to produce because they can see it at a certain price. One of the great failures made by socialists and collectivists over the decades and centuries is the adulteration or contamination of prices in orders and ethics. By doing that you take information out of the market and make innovation, and you lead to shortages and finally to suffering informative consumers. To summarize, I would say that the best policies to me are those that work towards deregulation and the most questionable are the ones who have given the government the power to fix prices to thereby destroy enterprise.
The Catalyst is geared towards high school students who don’t necessarily know a lot about economics if you could say one thing to them what would you want them to understand about the current market.
I would say that the wellspring of prosperity, the source of prosperity, is not even the wonders of our modern digital age, nor is it land necessarily, nor is it capital, but it’s the spirit of enterprise. The spirit of imagination and risking that brings into the world products and services from the raw material of ideas. I would say that the source of wealth, the wealth of nations, as Adam Smith said, is the enterprising spirit of the people.