Nilesh Jasani's Reviews > Lombard Street: A Description of the Money Market

Lombard Street is a much-needed, jargon-free treatise for those thinking about the viability of the cryptos, defi, and the like. While the messages here do not rule out a decentralized financial system without a lender of last resort or a centralized policymaker/rule-setter, the book will provoke many thoughts and spawn ideas in the minds of both their believers and skeptics.

Of course, the nineteenth-century authored book is simply the work of a genius; this aptly celebrated, landmark work helped found the first central banks and has influenced central banking ever since. Walter Bagehot's clarity of thoughts and writing in this book must have helped quash many needless policy debates before they reared their heads for decades while shaping conversations in many other directions.

For instance, the book cleared the way for the emergence of a central, government-owned, non-profit, competent person (as against a minister aka politician) led lender of last resort across the world. The book makes a comprehensive case for countercyclical policies by this institution in times of deep distress. It equally provides solid justifications for various lending or liquidity rules during normal times. As a result, the needs behind capital adequacy norms, reserve requirements, or central bank liquidity supporting/moping operations have rarely been debated even in highly non-capitalist systems until the arrival of the crypto crowd in recent times.

It may not matter how much of it all started with this book and the author to current readers. The leading utility of the book is in all its indirect messages when repurposed. The strongest crypto believers are highly dismissive of central banks for their fiat money issuer role. In some ways, the book has nothing on fiat currencies as it was published for a system that believed in the gold standard. Yet, the path paved here (by establishing the central banking processes that need the creation of reserves - aka money - from nothing when times are tough) was invariably going to lead to the emergence of fiat currencies a few decades hence.

That said, the book is the most lucid evidence of how history has been rather than the way many modern decentralized system proponents paint it. Centralization - through the central banks - was not borne out of the desire to print an unlimited amount of money or to invade anyone's privacy or because the intermediaries wanted to make more money. It happened because the decentralized financial world of the mid-nineteenth century (and before) had too volatile cycles borne out of regular market/liquidity/confidence forces. These cycles that first manifested themselves in money market flows and prices had to be pruned before they became circular and wreaked far more real-life damage when allowed to go on unchecked. As the author knew then and we all know now, central institutions like central banks do not solve all problems at all times, plus they come with their own "side effects," but a world without such institutions and attendant rules existed before this book was far worse.

Once again, this jargon-free book was the first paper that showed why a central institution was needed to bring order to a completely decentralized financial system that existed at the time. It was like that era's Satoshi paper! This reviewer cannot imagine how a decentralized system without such an institution can function for long in real life with repeated confidence and liquidity extremities that are a regular feature in trading markets. Real-life with real people and activities cannot afford impacts arising from unchecked financial gyrations because of the vicious cycles/circularities they create. Maybe, there is a decentralized system possible without such gyrations, but that's not what the crypto crowd is attempting to create when they discredit the current centralized system for its money printing and privacy-related flaws.