Charles Read’s second book, ‘Calming the Storms’, offers a glimpse of greatness – if we can learn from the past
Is Charles Read this generation’s John Maynard Keynes? Because with ‘Calming the Storms’ the astonishingly erudite author has already staked a claim to be Cambridge’s avatar economist for the 21st century.
The comparison with the 20th century omniscience of Keynes is perhaps unfair: Keynes is a fully-fledged institutional icon, while Dr Read is still an early-stage authorial voice. But give it time. Both display – in glorious technicolour – a common interest in and deep understanding of the complex interactions between institutions, markets, and social structures. Dr Read is – as Keynes was in his day – astonishingly intellectually precocious. Being able to open up new vistas is his calling card, as it was for John Maynard Keynes.
It just so happens that a Keynesian quote adorns the very first page of the introduction to this intriguing analysis of how British banking has conducted itself when faced with financial crises in the last two centuries. In it, Dr Read reinterprets Keynes’ famed “In the long run we are all dead” remark to great effect, suggesting that it referred not to deficit financing (as was widely assumed), but to the limitations of the quantity theory of money.
The quantity theory of money is very much the focus of ‘Calming the Storms’. In the 19th century, the Currency School were strict believers in it: paper money should be 100 per cent backed by gold. The British Banking School, a group of Victorian economists, disagreed, saying that bank operations should be governed by the needs of real trade and that the law of reflux – money backed by assets such as taxes – was sufficiently robust to sustain a healthy economic paradigm.
This wasn’t an argument in a vacuum: the switch from valuable metals to paper currency was under way in the 19th century and jeopardy was omnipresent. The US gold rush in the 1840s had brought clarity to the discussion: the bullion discovered there, and also in South Africa in the first decade of the 20th century, showcased the two schools’ differences. The Currency School thought such crises would resolve themselves. The Banking School said that the disequilibrium caused by increases in money supply in the short term could have catastrophic effects, and those effects could ensure that a return to the previous status quo would not be an option.
‘Calming the Storms’ looks at the Carry Trade to assess how these divergent views played out. This trade, says Dr Read, has been overlooked because it does not create wealth – “the winners are cancelled out by the losers”, as he writes. Nevertheless the Carry Trade – where an investor borrows money in one currency at a low interest rate and invests in a currency that has a higher interest rate – “is critical for an understanding of long-run British financial history over the past 20 years”. Most people view currency speculation as a side hustle, but at scale it can result in currency or trade imbalances – the unfair distribution of resources.
Currency imbalances are a short-term phenomenon yes, but with potentially profound consequences. The Victorian bankers of the late 19th century understood this, which is why Britain was one of the few major capitalist economies in the world to have avoided policy-induced systemic financial crises for more than 100 years of its history – between 1866 and 1973. This was quite an achievement, as Dr Read explains in detail – the analysis of the gold rush in the US is the best I’ve ever read. And then he goes further: banking activity in the UK since 1973, he says – and particularly during the financial crisis of 2007/2008 – shows that today’s generation of bankers have failed to understand the lessons of the Currency School vs the Banking School discussion, and we are all poorer (and more stupid) as a result. Or, as the author states: “The re-emergence of severe financial crises in 1973 (an oil crisis) and 2007-2009 was the result of the Bank of England forgetting the lessons the Banking School had taught it in the 19th century about how to manage the Carry Trade.”
He adds: “Whereas many economists and policymakers have been caught by the surprise by the return of severe banking crises in Britain, the global financial crisis would have looked rather familiar to many of their Victorian forebears.”
How did this happen? Bubbles, he writes, require three factors: marketability, speculation and cheap credit. Moreover, a glitch in human psychology always has the capacity to lure investors on to the rocks, whether it is tulips in Holland in the 17th century or the housing bubble ‘assets’ that almost did for the financial system in 2007. “Investors would often rather invest in something ridiculous than accept a low interest rate on a safe asset,” says the author, from a Walter Bagehot quote.
This is not to say the Bank of England always got it right in the 19th century. There were mistakes: keeping interest rates too low in the 1847 and 1857-58 crises threatened wider financial stability and made it harder – as Dr Read wrote in his superb ‘The Great Famine in Ireland and Britain’s Financial Crisis’ – to raise loans for Irish relief during the horrific years of famine. The Irish fiasco is, of course, just one example of how such crises are more important in the long run than has been previously appreciated or, as Dr Read puts it: “The panics that triggered the 1847 crises were particularly short-lived, but British and Irish people still live with its long-term consequences today, 175 years on.”
But “the Banking School did not simply have economic or financial goals”, the author writes. “They also had clear moral and political goals, namely about how to avoid crises and the threat from extremism that such events imposed upon the emerging liberal societies of their era.”
And the threat of extremism today is just as prevalent as it was then – though it could be argued that the main threat to financial stability is coming from within the political ideology of the ruling classes, as was ably demonstrated by Kwasi Kwarteng’s notorious 2022 autumn budget. There are lessons from the British Banking School that still need to be taken on board, as Dr Read told the Cambridge Independent when this book was published.
“The launch for my second book occurred on the day before the collapse of Silicon Valley Bank – a rather strange coincidence,” he said, “in that the novel theory of financial panics in British history that my new book presents seems to have been the exact same mechanism that brought SVB down.”
So could there be further financial termors to come? There certainly will be, especially as interest rates remain crushingly high. And could the long-neglected ideas of the British Banking School help Britain regain ground lost in the last 50 years? After reading ‘Calming the Storms’, the answer would have to be ‘yes’.
- Dr Read, a fellow at Corpus Christi College, teaches economics and history at the University of Cambridge. Subtitled ‘The Carry Trade, the Banking School and British Financial Crises Since 1825’, ‘Calming the Storms’ is published by Palgrave Macmillan and is priced at £105.
