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Essay Walter Bagehot Principles Of Business And Economics
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This is an essay about the theories of Walter Bagehot. This is an assignment for the course Principles of Economics and Business 1.
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Nowadays Banking Viewed by Walter BagehotThe European Central Bank is the central bank of the Economic and Monetary Union. It is
also one of the seven institutions of the European Union. The main task of the European Central Bank
is to maintain price stability in the eurozone. Nowadays banking isn’t about lending money and
controlling the money only. Today you see more and more banks that deal with more things than is
necessary. Walter Bagehot was a British economist who in 1873 published the book Lombert Street:
A description of the money market. In this book he described, among other things, what role the
central bank should play in times of crisis. Therefore, the question: “To what extent are some of the
problems Bagehot talks about still current? Are most of the issues with banking that he raised long
ago now resolved today, or do we still struggle with some of them?”
A main topic of Bagehot's chapter is the creation of reserves by banks for times when the
economy isn’t going well. According to the European Central Bank (2021), there are many reserves in
different currencies. The European Central Banks foreign reserves consist of assets denominated in
US dollars, Japanese yen, Chinese renminbi, gold, and special drawing rights. Over time, the
composition of the reserves changes due to changes in the market value of the invested assets, and due
to the European Central Bank’s foreign exchange and gold operations. According to Bagehot (1873),
bank reserves are a form of thrust. When a bank hasn’t enough reserves for hard times, the society
lose their thrust during these hard times, and this isn’t an advantage for banks after the hard times.
The problem raised by Bagehot that banks in his days don’t have enough reserves for hard times of
the economy, can be refuted by the fact that the banks, including the European Central Bank, are
building enough reserves.
Another topic from Walter Bagehot's (1873) chapter is that a bank is often run by external
management. This management often acts in its own interest, which means that it may make choices
that are not to the advantage of the bank itself. Management is often concerned with satisfying
shareholders by creating as much dividend as possible. This may lead to fraud, or conflict situations.
In 1999, the European Union adopted an Anti-Fraud system called the OLAF to control the
management of the European Central Bank (European Central Bank, 2021a). Looking at the problem
Bagehot mentioned in 1873, the European Union won’t adopt this Anti-Fraud systems when there
isn’t any fraud, or they aren’t afraid that there will be any fraud in the future. It can be said that this
problem Bagehot talks about is still current. However, the European Union is busy solving this issue
raised a long ago.
The last topic discussed in the chapter of Bagehot's book is that banks should be concerned
with being a bank. As soon as the bank is involved in all kinds of peripheral matters, it will ultimately
not go well (Bagehot, 1873). The European Central Bank is not just concerned with being a bank and
pursuing its vision. In addition to its normal activities, it is also heavily involved in charities
(European Central Bank, 2021). According to Bagehot (1873), it can be said that this isn't a good
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