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
An ‘art’, not a ‘science’? Central bank management in Portugal under the gold standard, 1863–87
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