The best books that take up Walter Bagehot’s challenge

Why am I passionate about this?

I remember in high school going to the gas pump and filling up during the oil crisis of the 1970s. Inflation was everywhere, but I had no idea what that was. I learned something about this in college and then in Congress as a legislative aide. I remember distinctly a conversation in Congress on how we were going to pay for these huge deficits that arose out of the Reagan tax cuts, all the while when inflation was peaking at that time. I had no idea. I then spent my PhD working in monetary economics to show the effect of inflation on the economy and have not stopped yet.

I wrote...

The Spectre of Price Inflation

By Max Gillman,

Book cover of The Spectre of Price Inflation

What is my book about?

Inflation, hyperinflation, and deflation have all had profound effects on societies, especially during periods of war and crisis. Today's approach to managing inflation has been shaped by these episodes and informed by debates between different schools of economic thought.

This accessible and authoritative overview explores the role of inflation in the modern economy, from its place in monetary policy and in money supply to its effects on everyday business. 

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The books I picked & why

Book cover of Lombard Street, a Description of the Money Market

Max Gillman Why did I love this book?

Lombard Street is the classic statement of how central banks began functioning to insure the private bank system against bank panics. Walter Bagehot wrote this at the time of a revolution in banking that came about after the Joint Stock Companies Act of 1862 allowed private banks to have limited liability. Banking then boomed in England, and the Bank of England went from being a private bank to a bank also serving the Crown of England, and finally into a central bank as we see them today. 

The Bank of England would hold reserves for the entire private banking system should they need them in times of bank panic, which were periodic in those days (and still today). At the same time, the Bank provided the money supply through note issue. This created a money and banking authority that was efficient in its practice of stabilizing the money and financial system. By “pooling” all of the private bank reserves, less reserves were held in the entire system, and more capital circulated and increased the wealth of nations, making England the center of international finance, as Bagehot argues.

By Walter Bagehot,

Why should I read it?

1 author picked Lombard Street, a Description of the Money Market as one of their favorite books, and they share why you should read it.

What is this book about?

This work has been selected by scholars as being culturally important and is part of the knowledge base of civilization as we know it.

This work is in the public domain in the United States of America, and possibly other nations. Within the United States, you may freely copy and distribute this work, as no entity (individual or corporate) has a copyright on the body of the work.

Scholars believe, and we concur, that this work is important enough to be preserved, reproduced, and made generally available to the public. To ensure a quality reading experience, this work has been…

Book cover of The Evolution of Central Banks

Max Gillman Why did I love this book?

Goodhart, a former head economist of the Bank of England, builds upon Bagehot to describe how modern central banks evolved to insure the private bank system.

Goodhart argues that regulations over private banks were unnecessary and that the shadow bank system (that had evolved since the Vietnam War era inflation drove banks away from the Federal Deposit Insurance Corporation in the US) would never go bankrupt. He argues that the investment banks always had sufficient reserves, so that increased regulation was undesirable.

The Crash of 2008 proved Goodhart wrong. Yet ironically, it is the exact same set of arguments that are being used today: banks do not need increased regulation since the Fed and Bank of England are now holding reserves, and private banks are also holding more reserves. Even the FDIC has argued against bringing investment banks into the FDIC system that is efficient, because it would involve increased regulation.

So, avid reader, the question is whether charging insurance premiums on deposits at a rate dependent upon the private bank’s riskiness in its assets is inefficient, which is what the FDIC does? Or is it that the huge build-up of reserves at the Fed, Bank of England, and European Central Bank are decreasing international investment while, at the same time, private banks are holding more reserves outside of the Fed?

The modern practice of central bank “after-the-crash” insurance is to hold untold “oceans of reserves” (as a Federal Reserve Bank working paper was titled) that decrease the capital that can circulate and be invested. The FDIC, in contrast, continues to insure the “retail” bank sector, basically now the small banks, in an efficient way. The problem that comes from reading Goodhart, combined with knowledge of the new world of post-2008 central banking, is that the lion’s share of capital from the large banks is now insured “ad hoc” in an inefficient manner by the Fed, Bank of England, and ECB. 

By Charles Goodhart,

Why should I read it?

1 author picked The Evolution of Central Banks as one of their favorite books, and they share why you should read it.

What is this book about?

The Evolution of Central Banks employs a wide range of historical evidence and reassesses current monetary analysis to argue that the development of non-profit-maximizing and noncompetitive central banks to supervise and regulate the commercial banking system fulfils a necessary and natural function. Goodhart surveys the case for free banking, examines the key role of the clearing house in the evolution of the central bank, and investigates bank expansion and fluctuation in the context of the clearing house mechanism. He concludes that it is the noncompetitive aspect of the central bank that is crucial to the performance of its role. Goodhart…

Book cover of Money Mischief: Episodes in Monetary History

Max Gillman Why did I love this book?

Friedman, a Nobel-winning former Economics professor, writes brilliantly and playfully, and students of economics love to read him. Yet he delves into the heart of the monetary problems that have been confronted historically. This he uses to shed light on how to conduct monetary policy today.

He ranges across the whole of American history. For example, the failure of the Continental Congress’s currency occurred since it was printed to finance the Revolutionary War when there was no federal government and no federal tax revenue. This led to the new US Constitution and the ability to raise taxes, and a stable currency that was backed by gold and silver.

With the Civil War, the US Treasury printed money called “greenbacks” and suspended conversion to gold and silver during the War, but re-established convertibility in 1879 at the pre-War rate. Friedman shows how this convertibility led to prolonged, hugely damaging deflation for more than thirty years. He explores how price stability could instead have been established.

Friedman’s ability to sort through dogma, politics, and economics is unparalleled in its insightfulness and reader popularity. Friedman turns Economics into a reader’s game of enjoyment while learning instead of learning while struggling with the concepts.

By Milton Friedman,

Why should I read it?

2 authors picked Money Mischief as one of their favorite books, and they share why you should read it.

What is this book about?

"A lively, enlightening introduction to monetary history…from monetarism's most articulate apostle."—Kirkus Reviews"The Oliver Stone of economics" (Chicago Tribune), Nobel Prize laureate Milton Friedman makes clear once and for all that no one, from the local corner merchant to the Wall Street banker to the president of the United States, is immune from monetary economics. In Money Mischief, Friedman discusses the creation of value: from stones to feathers to gold. He outlines the central role of monetary theory and shows how it can act to ignite or deepen inflation. Through colorful historical episodes, he demonstrates the mischief that can result from…

Book cover of Monetary Regimes and Inflation: History, Economic and Political Relationships

Max Gillman Why did I love this book?

Bernholz, a renowned Swiss Economics professor, builds upon Friedman to provide an unparalleled view of how budget deficits and high government spending end up being financed by the “inflation tax” of printing money to cover the deficits.

Throughout history back some two thousand years, Bernholz describes ancient and modern monetary regimes based on metallic standards and fiat money unbacked by any metal. He analyzes how increased money supply causes moderate, high, and hyper-inflations throughout this history. He provides dozens of historical examples of money and inflation in times of crises including war.

Bernholz adds the dimension of how international exchange rates are affected during rising inflation and when deflation ultimately occurs. He shows how different “laws” regulate behavior, with good money driving out bad money until the bad money collapses in value and then good money is created or imported that drives out the bad money to its extinction. Bernholz shows how these various degrees of inflation under different monetary regimes can be ended. He details cases in which monetary reform fails and cases when a new monetary regime is successful.

This great contribution provides a full menu of food for thought as to how today’s inflation episode might be brought under control and future episodes avoided.

By Peter Bernholz,

Why should I read it?

1 author picked Monetary Regimes and Inflation as one of their favorite books, and they share why you should read it.

What is this book about?

Acclaim for the first edition:
'Peter Bernholz's book brings together his comprehensive studies of inflation from the fourth century to the present, showing their common elements and their differences. This is an impressive work that bankers, central bankers, economists and laymen can read with pleasure and profit. I recommend it highly.'
- Allan H. Meltzer, The Hoover Institution, Stanford

Exploring the characteristics of inflations and comparing historical cases from Roman times up to the modern day, this book provides an in depth discussion of the subject. It analyses the high and moderate inflations caused by the inflationary bias of political…

Book cover of The End of Alchemy: Money, Banking, and the Future of the Global Economy

Max Gillman Why did I love this book?

King was the head of the Bank of England during the financial crisis of 2008. He declared full deposit insurance for the entire United Kingdom private banking system, with no deposit premiums required. This ended the run on the banks that spilled over into the streets of the UK during the crisis, when the Bank of England at first decided not to take care of Northern Rock, a private retail bank that was headed towards insolvency.

King provides a whimsical and sharp review of the private and central bank system before and after the crisis that builds very much on Charles Goodhart and Walter Bagehot. King laudably faults economists and the Economics profession for thinking that establishing negative real interest rates worldwide is the answer to central bank crises (in his newly added Introduction to the paperback edition of his 2016 hardback by the same name). Yet King sides with Goodhart unabashedly and proports that the private bank system needs no increased regulation over its operations. Bank insurance is hardly discussed, despite King having served up FDIC-style deposit insurance to the whole UK except without the cost of premiums.

Instead, King promotes that private banks need to take better care of themselves to be ready for any crisis. He suggests that central banks should essentially allow private banks to create living wills such that assets can be offered to them in case of crisis to keep the banks from dying. Put more precisely in King’s language, the central bank should act as a “pawnbroker for all seasons” by offering up cash reserves for private bank assets even if their value is hugely discounted during crises. Despite my view of the inefficiency of private bank “self-insurance” relative to a true FDIC mold of rigorous deposit insurance with risk-based premiums, King’s boldly proposed system was essentially taken on internationally by the US, UK, and ECB by designating the largest banks as systemically important.

With that came Fed bank health check-ups after the 2008 crisis that have spread to these systematically important banks across the Western global financial system, resulting in living wills being indirectly created for these banks. This may be a second-best or worse bank insurance system, but King undoubtedly has pushed the ball forward on thinking about how central banks should provide private bank insurance, the same topic that Bagehot promulgated.

By Mervyn King,

Why should I read it?

1 author picked The End of Alchemy as one of their favorite books, and they share why you should read it.

What is this book about?

Something is wrong with our banking system. We all sense that, but Mervyn King knows it firsthand; his ten years at the helm of the Bank of England, including at the height of the financial crisis, revealed profound truths about the mechanisms of our capitalist society. In The End of Alchemy he offers us an essential work about the history and future of money and banking, the keys to modern finance.

The Industrial Revolution built the foundation of our modern capitalist age. Yet the flowering of technological innovations during that dynamic period relied on the widespread adoption of two much…

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Larry R. Frank Sr. Author Of Wealth Odyssey: The Essential Road Map for Your Financial Journey Where Is It You Are Really Trying to Go with Money?

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