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Walter Bagehot: I am Walter Bagehot, editor of The Economist for seventeen years, author of Lombard Street, which remains the definitive account of how banking systems actually function as opposed to how passionate men with strong opinions imagine they function. I wrote the principles upon which every modern central bank now operates, including the institution my distinguished colleague here so deeply resents. I approach today’s topic with the mild curiosity one reserves for watching a man attempt to reinvent the wheel and produce instead a very expensive triangle.
William Jennings Bryan: I am William Jennings Bryan, three-time Democratic nominee for President of the United States, the man who stood before the convention of 1896 and told the banking class of this country that they shall not crucify mankind upon a cross of gold. I spoke for the farmers, the laborers, the men and women ground beneath the heel of financial elites who controlled the money supply for their own enrichment and called it sound policy. I am here today because the argument I made then has never been answered. It has only been papered over with more sophisticated machinery and a more polished class of apologist.
Walter Bagehot: I notice that Mr. Bryan describes his qualifications entirely in terms of how many people applauded him. This is, in miniature, the problem we are gathered here to discuss.
William Jennings Bryan: And I notice that Mr. Bagehot describes his qualifications entirely in terms of how many elites read his magazine. This is, in miniature, the problem I spent my entire career fighting.
Walter Bagehot: Touche. I will note that for the record and then proceed to dismantle everything else you intend to say.
Walter Bagehot: Let me explain what cryptocurrency actually is, since enthusiasm for a thing and understanding of that thing are frequently confused, particularly in democratic societies where applause functions as a substitute for analysis. Cryptocurrency is a system of exchange that deliberately eliminates the institutional backstop that prevents financial panics from becoming financial catastrophes. In Lombard Street I described with some care what happens when credit systems lack a lender of last resort. The answer is that they collapse. Spectacularly. Repeatedly. And the people who suffer most are not the speculators who designed the instrument. They are the ordinary depositors, the working people, the farmers and laborers whom Mr. Bryan has appointed himself to represent. Cryptocurrency does not liberate the common man from the banker. It removes the only protection standing between the common man and total ruin when the inevitable panic arrives, which it always does.
William Jennings Bryan: What Mr. Bagehot calls an institutional backstop, I call a chokehold. The Federal Reserve, which is the modern expression of everything Mr. Bagehot admires about institutional banking, was created in 1913 to serve the financial class. It sets interest rates that benefit lenders over borrowers. It expands and contracts the money supply according to what suits Wall Street, not what suits the man trying to pay his mortgage in Nebraska. When I argued for free silver, I argued that the money supply should not be controlled by a small group of men in Eastern cities whose interests were directly opposed to those of the people who produced the actual wealth of this nation. Cryptocurrency makes that same argument with better technology and a global audience. The Federal Reserve is the cross of gold with a printing press attached to it.
Walter Bagehot: The Federal Reserve is imperfect. I would be among the first to acknowledge this, since I am British and therefore constitutionally incapable of admiring American institutions without significant qualification. But the question before us is not whether the Federal Reserve is perfect. The question is whether replacing it with a system that has no institutional authority, no lender of last resort, no mechanism for preventing cascading bank runs, and a money supply controlled by a mathematical formula written by an anonymous person who may or may not exist, constitutes an improvement. The 2022 cryptocurrency collapse erased two trillion dollars of value in a matter of months. The people who lost that money were not, I can assure you, the Eastern banking elite.
William Jennings Bryan: The 2008 financial crisis, managed by your beloved institutional banking apparatus, erased eight trillion dollars in American household wealth and required the taxpayer to bail out the very institutions that caused the damage. When the Federal Reserve’s backstop fails, it fails on the backs of ordinary people. When cryptocurrency fails, it fails on the backs of people who chose to accept that risk. I will take voluntary risk over involuntary extraction every time.
Walter Bagehot: I am now going to present Mr. Bryan’s argument in its strongest possible form. I do this not out of generosity, which would be uncharacteristic and might alarm my colleagues, but because demolishing a weak version of an argument is unsatisfying and leaves one with the nagging feeling that the actual argument has escaped into the countryside. The strongest case for cryptocurrency as a challenge to central banking runs as follows. Central banks are captured by the financial institutions they nominally regulate. They systematically favor creditors over debtors, which transfers wealth upward across generations. Fiat currency allows governments to inflate away the savings of ordinary citizens without their explicit consent, which is taxation without representation carried out with the benefit of plausible deniability. A fixed and decentralized money supply would end this invisible extraction and impose financial discipline on institutions that currently face none because they know the public will absorb the losses when things go wrong. This is a serious argument advanced by serious people and I raise it here only so that I can explain with some precision and no small personal satisfaction exactly where it fails.
William Jennings Bryan: I appreciate the unusual spectacle of Mr. Bagehot offering something approaching generosity. It must be physically uncomfortable for him.
Walter Bagehot: You have no idea what it costs me.
William Jennings Bryan: The argument fails, in Mr. Bagehot’s telling, because decentralized currency produces instability. But I would press him on what stability actually means and for whom it has been maintained. The gold standard that Mr. Bagehot and his colleagues defended with such institutional confidence was perfectly stable for creditors. It was catastrophic for debtors. A fixed money supply in a growing economy is a deflationary trap. It rewards those who hold money and punishes those who must borrow it. The farmer who takes out a loan in tight money conditions and must repay it in even tighter money conditions is not experiencing stability. He is experiencing a slow financial execution administered by men who would never call it by that name. I will now steelman Mr. Bagehot’s position in turn, which I do solely to demonstrate that I have read his book, and not because I found it persuasive or enjoyable.
Walter Bagehot: High praise indeed.
William Jennings Bryan: The central argument of Lombard Street is that financial panics are self-reinforcing in a way that makes them uniquely destructive without external intervention. When depositors fear a bank will fail, they withdraw their money, which causes the bank to fail, which validates the fear of every other depositor, which causes every other bank to face the same run until solvent institutions are swept away alongside insolvent ones. The only mechanism capable of interrupting this cascade is an institution with sufficient authority and sufficient resources to lend freely at a penalty rate, stopping the panic before it becomes a general collapse from which recovery takes a generation. This is a genuine insight grounded in actual observation of how financial systems behave under stress. I acknowledge it as such. My argument is not that panics do not happen or that the function of a lender of last resort has no value. My argument is that the institution built to perform that function has been captured by the class that profits from the conditions that generate panics, and that this capture has become so complete that the institution now exists primarily to protect those interests under the cover of protecting the public.
Walter Bagehot: That is a fair and reasonably accurate summary of my argument, and a more coherent critique of it than I typically receive from opponents in this tradition. I find this mildly unsettling and will try not to show it.
Walter Bagehot: Allow me to address the capture argument directly, since Mr. Bryan has made it the spine of his case and it deserves a substantive response rather than a rhetorical deflection, which would be too easy and somewhat beneath me on this occasion. Is the Federal Reserve influenced by financial interests? Yes, to a meaningful degree, and I would not insult your intelligence by pretending otherwise. Is this a reason to eliminate the function of a lender of last resort entirely? No. It is a reason to reform the institution. The answer to a corrupt fire department is not to abolish fire departments and trust that fires will resolve themselves through the spontaneous cooperation of libertarian volunteers. Cryptocurrency does not solve the capture problem. It replaces one form of concentrated institutional power with a different form of concentrated power held by early adopters, large holders, and technical insiders who positioned themselves before anyone else understood what was being offered. Bitcoin was supposed to be democratic money. Fourteen percent of the supply is currently held by one percent of the wallets. That is not liberation from concentrated financial power. That is concentrated financial power with considerably better marketing.
William Jennings Bryan: The fact that cryptocurrency has been imperfectly implemented in its early years does not disprove the underlying principle any more than the failures of individual banks disprove the principle of commercial credit. Every reform movement in history has been partially captured by interests that were not its original constituency. The question is whether the underlying principle is sound. And the underlying principle is sound. Money should not be controlled by an unelected committee whose institutional incentives are systematically misaligned with the interests of the people who use that money and cannot opt out of using it. Mr. Bagehot writes with great elegance about how the Bank of England ought to behave. He is considerably less forthcoming about how it actually behaves in practice, year after year, when the interests of creditors conflict with the interests of the public.
Walter Bagehot: I wrote Lombard Street precisely because the Bank of England was not behaving as it ought. I am not an apologist for institutions. I am a diagnostician of them. And my diagnosis is that the cure Mr. Bryan proposes would kill the patient at a speed that makes the existing disease look like a minor complaint requiring a change of diet.
William Jennings Bryan: Your patient has been dying slowly for a hundred and fifty years. The cure keeps being postponed. At some point a reasonable man must consider whether the physician has a financial interest in keeping the patient dependent on treatment he controls.
Walter Bagehot: That is a striking formulation and I will not pretend it landed without effect. But the answer to a flawed institution is not the abolition of institutional function. You are proposing, in the name of the common man, to eliminate the last systemic protection the common man has against the kind of cascading collapse that destroys savings, eliminates employment, and produces the social conditions in which demagogues find their most receptive audiences. I mean that as a structural observation rather than a personal remark, you understand.
William Jennings Bryan: I have been called worse things than a demagogue by considerably smaller men and have worn the accusation without embarrassment. And I will note for the record that the protection you are so proud of required eight trillion dollars of public money to function in 2008, charged to the account of the common man it is supposed to serve. He is still paying that bill. His children will also pay it. This is what you call a backstop.
Walter Bagehot: What I call it is the least damaging option available in the circumstances created by insufficient regulatory discipline, which is a different argument than the one you came here to make. I notice you have shifted from arguing against central banking as a principle to arguing against specific failures of regulatory implementation. These are not the same argument, and the distinction matters considerably.
William Jennings Bryan: I am making both arguments at once, Mr. Bagehot, because both are simultaneously true. The principle is flawed and the implementation is corrupt. You cannot reform your way to justice when the institution doing the reforming is the institution that benefits from injustice. That is not reform. That is managed capture with quarterly reporting.
Walter Bagehot: A managed system with flaws is still a managed system. An unmanaged system does not become just because no one is in charge of its injustice. It simply becomes faster and louder and considerably more expensive for the people standing closest to the collapse when it arrives. I have documented what that looks like. The documentation is available and I commend it to Mr. Bryan, who appears not to have found it persuasive the first time he encountered it.
William Jennings Bryan: I found it precise, well-reasoned, and written entirely from the perspective of a man who has never once in his life depended on the outcome of an interest rate decision to determine whether he could feed his family. The analysis is not wrong, Mr. Bagehot. It is simply written in a language that can only be read comfortably from a certain altitude. The people I represent do not live at that altitude and they never have.
Walter Bagehot: The people you represent are precisely the people I am arguing should not be exposed to the unmitigated consequences of a financial system with no institutional capacity to absorb a crisis. I am not defending their exploitation. I am arguing that the alternative you propose would expose them to something considerably worse than exploitation. You are offering them the satisfaction of watching the system burn. I am arguing that they are standing inside the building.
William Jennings Bryan: And I am arguing that the building has been on fire for a hundred and fifty years and the men telling us to be patient while they manage the flames are the same men who lit it.
