The Politics of Banking

A notion prevails that the money market is something so impalpable that it can only be spoken of in very abstract words…. But I maintain that the Money Market is as concrete and real as anything else; that it can be described in as plain words; that it is the writer’s fault if what he says is not clear.✶

The briefest and truest way of describing Lombard Street is to say that it is by far the greatest combination of economical power and economical delicacy that the world has ever seen.

The best thing undeniably that a Government can do with the Money Market is to let it take care of itself.

Banking is a watchful, but not a laborious trade

Credit — the disposition of one man to trust another — is singularly varying. In England, after a great calamity, everybody is suspicious of everybody.

Men of business have keen sensations but short memories.

In political activity… men sail a boundless and bottomless sea; there is neither harbour for shelter nor floor for anchorage, neither starting-place nor appointed destination. The enterprise is to keep afloat on an even keel.¹

Banking is a risky trade but regulating banks is riskier still. The bank supervisor has great responsibility and little power — at least, little power to control events in banking markets where innovation is frenetic, information is complex and actors are highly opportunistic. The amazing feature of modern banking is not that some banks fail but that so few do so. In recent years failure has indeed become commonplace. In the United States there were seventy-nine failures during 1984, the highest figure for nearly fifty years. Continental Illinois, one of the largest and most prestigious American institutions, was only saved from collapse by the intervention of Federal regulators. There was a systemic crisis in the whole Ohio state banking system and large numbers of farm banks were pushed to the brink of failure. The Federal Deposit Insurance Corporation estimates that around eight hundred American banks have prudential problems.¹ In Germany in 1984 the central bank was forced to arrange a £150 million rescue of a leading institution and in September 1985 Canada saw its first bank failures since 1923.²