Responding to Financial Crises: Why Didn’t Keynes Make Greater Use of the Bagehot Principle in the Treatise on Money?

抄録

In the Treatise on Money, Keynes outlines a theory of cycles that includes the case of financially-induced asset price inflation in which banks provide credit to speculators who over-extend themselves. This can lead to bubbles which, after bursting, generate economic downturns. While Keynes has something to say in the Treatise about how central banks ought to respond to the possibility of economic fluctuations, he does not cite Walter Bagehot’s principle of lending freely to solvent banks in a crisis, despite being aware of Bagehot’s analysis in Lombard Street. This paper highlights the surprising nature of this omission on first inspection by comparing the treatment of financial crises in the Treatise with that in Lombard Street, and finding a significant degree of similarity. But it also offers a possible explanation for Keynes’s omission of the Bagehot principle by suggesting that Keynes advocated an alternative that made an appeal to this principle unnecessary. Rather than advocating Bagehot’s prudential policy of accumulating a banking reserve that could be deployed ex post once a crisis occurs, Keynes recommended the ex ante use of monetary policy to prevent crises from occurring in the first place. By maintaining Bank Rate at the natural rate of interest, investment and saving can be kept in balance, which not only leads to stable prices within the theoretical framework of the Treatise, it also makes the trade cycle and financial crises obsolete. A comparison of the policy responses to financial crises in Keynes’s Treatise and Bagehot’s Lombard Street thus raises the question of the respective roles played by prudential regulation and monetary policy in dealing with this phenomenon, a question of enduring relevance.