Lords of Finance: The Bankers Who Broke the World

by Liaquat Ahamed

These men had all been reared on Walter Bagehot’s nineteenth-century classic Lombard Street, which described how the Bank of England, then the financial center of the world, handled financial crises and panics. Bagehot argued that during normal times a central bank should follow the gold standard rule book, allowing credit to expand and contract in line with bullion reserves. But in a financial crisis, it should throw away the rule book and “lend freely, boldly, and so that the public may feel you mean to go on.” As he put it, “A panic . . . is a species of neuralgia, and according to the rules of science you must not starve it.” In other words, a central bank had to be willing to inject as much money as was necessary to satisfy the public demand for cash and safe assets. But Bagehot did inject one caveat. Though he argued that in a panic the