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Lombard Street : a description of the money market

Creator: Bagehot, Walter, 1826-1877
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His aid may be most efficient. He is, on finance, the natural exponent of the public opinion of England. And it is by that opinion that we wish the Bank of England to be guided. Under a natural system of banking we should have relied on self-interest, but the State prevented that; we now rely on opinion instead; the public approval is a reward, its disapproval a severe penalty, on the Bank directors; and of these it is most important that the finance minister should be a sound and felicitous exponent. CHAPTER V. The Mode in Which the Value of Money Is Settled in Lombard Street. Many persons believe that the Bank of England has some peculiar power of fixing the value of money. They see that the Bank of England varies its minimum rate of discount from time to time, and


PREFACE. WE were about preparing a few words of introduction to this volume, the materials for which have been culled from the highways and byways of literature, where our eyes fell upon these fitting sentiments, the authorship of which we are unable to give. They express clearly and beautifully what was in our own mind:-- "If we would only bring ourselves to look at the subjects that surround as in their true flight, we should see beauty where now appears deformity, and listen to harmony where we hear nothing but discord. To be sure there is a great deal of vexation and anxiety in the world; we cannot sail upon a summer sea for ever; yet if we preserve a calm eye and a steady hand, we can so trim our sails and manage our helm, as to avoid the quicksands, and weather the storms that threaten shipwreck. We are members of one great family; we are travelling the same road, and shall arrive at the same goal. We
that, more or less, all other banks follow its lead, and charge much as it charges; and they are puzzled why this should be. 'Money,' as economists teach, 'is a commodity, and only a commodity;' why then, it is asked, is its value fixed in so odd a way, and not the way in which the value of all other commodities is fixed? There is at bottom, however, no difficulty in the matter. The value of money is settled, like that of all other commodities, by supply and demand, and only the form is essentially different. In other commodities all the large dealers fix their own price; they try to underbid one another, and that keeps down the price; they try to get as much as they can out of the buyer, and that keeps up the price. Between the two what Adam Smith calls the higgling of the market settles it. And this is the most simple and natural mode of doing business, but it is not the only mode. If circumstances make it convenient another may be adopted. A single large holder--especially if he be by far the greatest holder--may fix his price, and other dealers may say whether or not they will undersell him, or whether or not they will ask more than he does. A very considerable holder of an article may, for a time, vitally affect its value if he lay down the minimum price which he will take, and obstinately adhere to it. This is the way in which the value of money in Lombard Street is settled. The Bank of England used to be a predominant, and is still a most important, dealer in money. It lays down the least price at which alone it will dispose of its stock, and this, for the most part, enables other dealers to obtain that price, or something near