181In principle, o course, Grant and
Hankey have a point. It seems oensive
that the Federal Reserve should bail out
Wall Street fat cats and yet allow
hard-pressed homeowners to suer the
disaster o foreclosure. It seems evident
that bailouts only weaken borrowers’
incentives to restrain themselves, thus
compounding the fragility o nance.
But the answer to these arguments is
that in practice, bailouts work: by fur-
nishing a panicked system with money,
they prevent a freeze in payments that
would cause a depression. For this
practical reason, governments repeatedly
suspended the gold standard during
nancial crunches, even as the authori-
ties, acknowledging that the likes o
Grant and Hankey were correct in
principle, fervently pretended that each
suspension was a one-time exception.
The British government made suppos-
edly one-o exceptions in 1847, 1857,
and 1866. Even in 1971, when U.S.
President Richard Nixon abandoned
the dollar-gold link, his administration
claimed that the break was temporary.
Back in the 1870s, Bagehot’s contribu-
tion to this debate was to observe what
was happening, rather than comment on
what theoretically ought to be happen-
ing. In principle, a gold standard that
ruled out the possibility o bailouts
might be expected to deter reckless
nancial risk-taking. In practice, it did
not: “In a great country like this,”
Bagehot remarked, “there will always be
some unsound banks, as well as some
insolvent merchants.” Because reckless
behavior persisted, the central bank had
to respond. And respond it did, even as
it refused to admit that it was bound to
do so—“though the practice is mended
the theory is not,” as Bagehot put it.The Internship
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