1: Introduction
Lombard Street is the financial district of London and was the seat of economic power in the world of the author's time, whose financial resources were triple that of New York, ten times that of Paris, and nearly fifty times that of the German empire in terms of "known deposits."
While other countries claimed to have more cash in circulation, much of the wealth of Britain remains banked, and the currency in circulation was "money market money" - that is, credit money, bank notes, and other forms of fiduciary media that circulate while the money they represent remains safely in bank vaults or, in terms of credit money, expected to arrive at the bank in due time. It is the concentration of wealth in banks and the use of fiduciary media that has enabled England to amass great wealth and continue to generate it at a significant rate.
The problem in having cash in wide circulation is that it remains divided and can become scarce. Undertaking a great enterprise requires a great sum of cash, and economies in which the only token of exchange that can be had is widely dispersed in small amounts finds itself without the capital resources for large-scale enterprises: one cannot build a railway or launch a fleet of ships if the financing of them requires physical money to change hands.
The author also credits the notion of interest for economic stimulation: if interest is owed on a borrowed sum of cash, the borrower must make all the more industrious use of what he borrows in order to repay his debt, plus the interest, and still have a sufficient profit for his effort and the risk he has undertaken. And given that interest grows over time, he has good cause to put his capital to work in a way that will increase his wealth promptly.
Meanwhile on the supply-side, the promise of interest makes those who have wealth more inclined to make it available to those who can make productive use of it. Idle money earns no profit, and wealth can be increased if it is provided to those who require capital.
Another benefit of the availability of credit is egalitarianism and meritocracy. The ability to borrow money generates opportunity to men of vision and ability, regardless of the financial means they have by accident of birth. Men of business put the assets at their disposal, generating both the goods that provide for a higher standard of living and the wages by which they can be obtained to the masses who, left to the care of the aristocracy, remained impoverished for generations.
The aristocracy of Europe have done much to earn a reputation for wastefulness and idle luxury, and men who inherit wealth are conservative, inclined to believe that their wealth is best preserved by keeping things as they are - primitive and impoverished as they may be for the other classes. No nation of "hereditary trade" has progressed as greatly, nor increased the standard of living for the most common of its citizens, as England, buy virtue of free commerce.
In a sense, the growth of wealth in England has been "constant and chronic borrowing" facilitated by the bankers of Lombard Street. They are the brokers between those who have wealth and know not what to do with it, and those who need money and have a productive purpose in mind. It redistributes wealth between the areas of the nation, and of the world, where money is most greatly needed and those where there is more money than can be used. Under this systems, money flows to where it is most wanted.
It is also because of the lethargy of money in other nations of Europe that has increased the wealth of England. In any location where there is little money to be had and great opportunity for its employment, enterprising traders will seek to borrow capital from abroad. English money finances economic development not just at home, but the world around.
Moreover, this arises not from a planned and legislated application, but to an utterly unconscious organization of capital: no deliberation of parliament is necessary for a man who needs capital, in any amount, to obtain it of those who are willing to lend it to him - he need only to convince a lender of the profitability of his plan, and the means to put it into effect are shortly placed in his hands.
The author suggests that there are many other points that he might make, but further elaboration seems unnecessary - the main conclusion is plain: the availability of credit provided by a free banking system has made England the economic center of the world, while nations that do not facilitate borrowing or seek to impede the free flow of capital have stagnated or declined.
While the system is powerful, it is also delicate. The greater proportion of money loaned out by bankers is payable on demand - if some panic was to cause a significant number of the owners of money to withdraw their funds, the financial system would collapse, and the industrial system that depends on the ability to borrow funds would also be in grave danger. This is not only true of England, but for all of Europe - since the Franco-German wars, England has become custodian to a large sum of foreign money, and its financial system would likewise be in dire straits should foreign depositors demand the return of their funds.
Between the two, there never was any nation in which the ratio of cash to the balance of bank accounts so small as it presently is in England, and it's distressing to think of how minute the amount of money on deposit seems compared to the immensity of credit which has been written on it.
Aside of the damage that could be done by a loss of confidence by depositors, there is also some insecurity in the discretion of bankers: to maintain the credit system requires a careful hand, and banks do not always act with as much responsibility as they should. He points to the example of Overend, once a solid and stalwart institution in banking, whose indiscretions ruined the company in six years, and whose manner was so reckless and so foolish that one would think a child could have managed it better.
There is also the general arrogance among men of business, who assume that there is safety in the system, and who have a false sense of permanence. While the business of banking is long established, the business of credit has grown significantly in the past thirty years or so, and this is a relatively short history to give such a sense of experience and safety as some seem to take in the institution.
Even so, the author claims "I am by no means an alarmist." He recognizes the fragility of the system, but believes that it can be perpetuated - though doing so requires that we work to better understand it to ensure that we have a sense of what we are doing.