Walter Bagehot, arguably the most influential editor of The Economist, is best known today for his classic work on finance, Lombard Street, first published in 1873. Bagehot was writing during an era when financial crises convulsed the economy on a regular basis—most recently in 1866, when Overend, Gurney and Company, a massive British bank, went under, taking down a number of other banks and corporations in the process. Such cataclysmic events left many of his contemporaries baffled, even terrified, and Bagehot set out to demystify the causes of these crises by offering a simple, straightforward exposition on the subject of credit and debt for Victorian readers. “Credit,” he explained, “means that a certain confidence is given, and a certain trust reposed.” But confidence was one thing, repayment another: “credit is a set of promises to pay,” he observed, but “will those promises be kept?”
Probably not, warns Philip Coggan, who writes the “Buttonwood” column for the magazine Bagehot made famous. Echoing his illustrious predecessor, Coggan writes in Paper Promises that “when we borrow or lend money, it is an act both of trust and of confidence.” Coggan is evenhanded and lucid, and he shares with Bagehot a keen appreciation of the fragility of modern finance, the perils of speculative booms and the brutal consequences that often accompany the inevitable busts. Both speak as well from extensive experience: Bagehot as a banker and financial commentator, Coggan as an accomplished journalist covering the City and financial matters generally.
But there the similarity ends. Bagehot believed that central banks had a duty to serve as a lender of last resort during a financial crisis, and much of Lombard Street offered a blueprint for how the Bank of England (and, later, the Federal Reserve) should respond to crises. The president of the Dallas Federal Reserve recently described Bagehot (along with Milton Friedman) as one of the “patron saints” of modern central banking, an authority who bequeathed a playbook for how central banks could serve as a lender of last resort.
Coggan is less optimistic. The current financial crisis, he avers, is not a problem of liquidity; it is a pervasive problem of solvency. “The massive debts accumulated over the last forty years can’t be paid in full, and they won’t be paid,” and no amount of easy money from the world’s central banks will cure the problem. Nor will more unorthodox measures such as quantitative easing, in which central banks intervene in the markets by purchasing long-term government debt, and which Coggan pointedly compares to the hyperinflationary policies of the Reichsbank under the Weimar Republic (and, somewhat more distant in memory, to medieval debasements of the coinage).
It comes as no surprise, then, that Coggan is sympathetic to the Austrian school of economics associated with Friedrich Hayek, Ludwig von Mises and other luminaries of libertarianism. The Austrians have a deep skepticism of central banks and their meddling ways; indeed, they are deeply suspicious of attempts to “fix” the economy, viewing this ambition as nothing more than hubris. It’s far better, they argue, to leave such matters to the market.
Though Austrian economists are often as zealous in their beliefs as the members of certain fundamentalist religious sects, Coggan is a halfhearted convert at best. He accepts the idea that central banks helped cause the present financial crisis by keeping interest rates far too low. “The tricky bit,” he writes, “is accepting the Austrians’ conclusion that the only option is to let the crisis blow itself out.” This Coggan cannot stomach, calling it the “counsel of despair.”
Yet despair pervades Paper Promises: while Coggan occasionally engages with the ideas of Keynes and his latter-day adherents, one imagines he is doubtful that more “stimulus” (and thus more debt) will solve much of anything. Keynesians like Paul Krugman have railed against the fatigue and alleged ignorance of contemporary policy-makers as a perverse form of “learned helplessness,” but Coggan clearly thinks that there isn’t a whole lot that can be done to fix the problems that beset the global economy. As he states bluntly at one point, “there are no easy answers in economics.” Such fatalism stems from Coggan’s Austrian leanings, but it is also a reflection of his deep, if tragic, reading of financial history. Like Carmen Reinhart and Kenneth Rogoff, whose This Time Is Different (2009) has become the standard reference work on financial crises past and present, Coggan believes the current debt crisis fits a historical pattern, one that will inevitably end in tears for the developed world.