This is a wonky book, and not for everyone.  It details the actions of monetary policy in the United Kingdom for much of the 19th Century.  In Great Britain, that was a century of incredible growth, and yet stability of the overall price level.  The Gold Standard worked, and the UK Government di not try to cheat on it, as it did in the early 20th century before the Great Depression.

One of Bagehot’s main ideas was that during a crisis, central banks should lend at a penalty rate without limit, and that would re-liquefy the marginal banks in the system that just needed a little to get by.  Bad banks would fail; good banks would not need to borrow.  We can contrast that with present policy of the Fed to lend against marginal collateral at favorable rates.  Ain’t no chance of us getting out of the problem that way.  All we do is create a new class of arbitageurs to extract money from the taxpayers, or Treasury note buyers.

The mangement of a good central bank is very conservative, and keeps a reserve large enough to avoid all disasters.  This again is the diametric opposite of the Federal Reserve, which was not in a conservative posture, and believes it can solve all of the credit problems through the wanton expansion of its balance sheet.

For a classic understanding of central banking, do not read Ben Bernanke.  Instead, read Walter Bagehot.  If you want to buy it, you can find it here: Lombard Street: a description of the money market.  Or, you can get it for free here.

PS — Remember, I don’t have a tip jar, but I do do book reviews.  If you enter Amazon through a link on my site and buy things from them, I get a small commission, and you don’t pay anything extra.  I’m not out to sell things to you, so much as provide a service.  Not all books are good, and not every book is right for everyone, and I try to make that clear, rather than only giving positive book reviews on new books.  I review old books that have dropped of the radar as well, like this one, because they are often more valuable than what you can find on the shelves at your local bookstore.

At his excellent blog, Paul Kedrosky posted a piece on bank deposit guarantees across nations.  It included this graph:

Now I will give you an unusual analogy that reflects the story that this graph is telling us.  This is somewhat like what the Defined Contribution [DC] plan industry went through when it moved from annual valuation, annual redirection of monies, to quarterly, to monthly, to the eventual change your asset allocation once a day if you like.

With annually, a huge number of people would make moves. Quarterly, not so much, but it still increased the over all number of transactions. Monthly brought a decline in the total number of transactions. Daily? Few people transact because they can always do it.

So, when the guarantee is unlimited, few take advantage of it. When it is limited, people get far closer to the limit on average.

This is just another application of behavioral economics.  When something is free, people don’t value it as much, so they don’t use it.  When something is hard to do and valuable, they take every opportunity.  In between they act to some degree to preserve value at the appropriate dates or amounts.  After all they will have another chance soon.