Henry St. John, Viscount Bolingbroke (1678-1751) was a leading minister in the Tory government of 1710-14, prime minister for four days at its end, then after the Hanoverian succession spent the rest of his life mostly under attainder and moving between opposition, journalism and exile. At the end of his life, disgusted with political developments since 1714, he wrote a best seller “On the Idea of a Patriot King” which after his death became the principal inspiration for George III and many of whose policies were put into practice by the great Tory governments of 1783-1830. In a similar position to Bolingbroke’s vis-a-vis the British financial system, essentially closed to me since the Financial Services Act of 1986 destroyed the merchant banks (though entirely without Bolingbroke’s previous distinction) I will take the opportunity presented by this week’s advertisement for a new Bank of England Governor to discuss what an ideal Patriot Governor might do.

Now that the Bank of England has regained responsibility for financial regulation, its Governorship is a very important job, arguably more important to the British economy than most Prime Ministers or indeed than the constitutional monarchs of Bolingbroke’s later years. After all Rowland, Lord Cromer, Governor in 1961-66 restored the City from a backwater to a central place in international finance through sponsoring the Eurobond market even though he was hampered by two economically inept prime ministers in Harold Macmillan and Harold Wilson. Conversely Gordon Richardson (1973-83) and Robin Leigh-Pemberton (1983-93), two feeble Governors, presided over the destruction of the traditional City of London even though they coincided with an economically able prime minister in Margaret Thatcher. Further back, the great Montagu Norman (1920-44) was largely responsible for the fall of the 1929-31 Labour government and its replacement by the economically outstanding 1931-40 National coalition.

To Bolingbroke, the first essential of a Patriot King was that he govern in the interests of Britain, and not subordinate those interests to the MittelEuropan petty politics of Hanover. Similarly, a Patriot Governor will run the British financial system and monetary policy in the interests of Britain, and not subordinate those interests to the bureaucratic power-grabbing of Brussels, nor to the greed barons of Wall Street.

In terms of regulation, apart from resisting Brussels encroachments, a Patriot Governor would tilt the playing field sharply in favor of medium-sized financial institutions and those with primarily British ownership. The 1986 legislation’s “level playing field” theory was extremely misguided, for two reasons. First, ownership is not trade; the arguments for allowing free trade and not discriminating against foreign goods do not apply to discrimination against foreign ownership of assets. Britain is not better off because Kraft bought Cadbury’s, it will not be better off when EADS has absorbed British Aerospace and it certainly became very much worse off when the British merchant banks and brokers were sold off to inept global behemoths. A Patriot Governor will tilt the playing field firmly in favor of British ownership groups and British management.

Even more important than nationality, however is size. The pre-1970 merchant banks were an appropriate size, large enough to undertake the most important international business, but sufficiently small to retain an effective partnership culture. However in the 1970s a combination of punitive taxation and high inflation created in Britain an Incredible Shrinking Banking System; by 1980 the merchant banks were in real terms half their previous size. Naturally when placed on a level playing field against the Green Bay Packers of the New York houses, they were obliterated – literally.

On the other hand, the Barclays debacle, not just recently but over the last 40 years, has surely demonstrated beyond doubt that banking behemoths with large retail operations are not capable of running investment banking businesses in an effective and ethical manner. Further, Paul Volcker is right: modern trading operations are far too dangerous to be financed through individual savings or with deposit guarantees. It was revealed last week that the UBS trader Kweku Adoboli not only lost $2.3 billion by foolish and excessive trading, he could well have lost $12 billion, putting the bank out of business. Similarly the $400 million lost by machines run amok at Knight Capital could just as easily have been some substantial share of U.S. Gross Domestic Product; with the computers trading in milliseconds there was no effective limit to the hole they might have dug.

A Patriot Governor will thus enforce strictly a Volcker Rule preventing the London-based behemoth retail banks from engaging in investment banking or more than modest trading operations. He will encourage trading to be carried out by privately capitalized hedge funds, which can quietly and without bailout lose their foolish shareholders’ money. At the same time, he will in the remainder of the business tilt the playing field sharply towards smaller domestically-controlled entities, encouraging the formation of advisory-dominated firms, both in corporate finance and investment management, which will over time re-create a merchant banking culture. In all areas except branch banking, where size is inevitable, he will regulate and guide with a strong presumption against excessive size or trading orientation. As new firms emerge, the Patriot Governor will re-establish the informal system of guidance present in the pre-1980 City, re-creating such bodies as an Accepting Houses Committee.

These changes will be ineffective however unless monetary policy is also reformed. The last decade’s riot of speculation and hollowing out of the Western world’s capital base has been hugely enabled by grossly negative real interest rates, in Britain as in the United States. Indeed the Bank of England’s government bond purchases and interest rates far below the inflation rate have been even more extreme than Ben Bernanke’s efforts at the Fed. Like Bernanke’s efforts, they have been completely ineffective in regenerating the economy, but brilliant at pumping up bank profits, sucking away the wealth of savers and encouraging the most useless forms of financial services speculative activity.

Even if he wants to, the new Governor will not have the opportunity to pursue current policies for very long. With Bernanke having given “quantitative easing” another rocket boost on September 13, the lifetime of global Bernankeism can now be measured in months or at most quarters rather than years. While it’s possible that an incoming President Romney would move quickly to replace Bernanke, more likely Bernankeism will continue well into 2013 and even, as the Fed currently proposes, into 2014-15. In that event, its contradictions will finally reveal themselves in rapidly rising inflation and in an increasing reluctance by international investors to hold dollars. With ECB President Mario Draghi also committed to buying dodgy Mediterranean government bonds in indefinite amounts, the chances are that the euro will go the same way, or possibly break up altogether.

At that point the Bank of England Governor will be presented with a conundrum. The global dollar standard, in effect since 1945, will effectively have broken down and the world will no longer have a satisfactory international store of value. An ordinary Governor would nevertheless follow the herd, believing that Britain was too small to act alone, and would descend along with the rest of the world into the hyperinflationary abyss and economic collapse.

A Patriot Governor would be made of sterner stuff. Faced with the collapse of the global economy into hyperinflation, he would know what to do. He would immediately restore the Gold Standard, at a parity of 1250 pounds to the ounce of gold (if the gold price was approximately the $1,750 of today) equivalent to $2,000 per ounce. At the same time, he would put up short-term interest rates to around 4%, moderately but not excessively tight in an environment where the new gold pound could be expected to keep its value.

With the pound denominated in gold but undervalued in this way, and real interest rates fairly high, a massive inflow of funds to the United Kingdom would occur, which the Patriot Governor would sterilize through purchases of gold on the international market, restoring Britain’s gold reserves to a level at which coinage would be possible. Once he felt the reserves were at a safe level, he would coin New Sovereigns, with a face value of 400 pounds, which would be larger than the traditional pre-1914 sovereign since they would contain 0.3125 ounces of gold instead of the traditional 0.2354 ounces. These would be available to individuals and institutions in banks throughout Britain, thus restoring the full pre-1914 Gold Standard and not the inferior 1925-31 version. Probably the Patriot Governor would seize the opportunity to establish a gold New Sterling, to replace the old at a rate of 400 to 1.

Since the Gold Standard had been restored at a slightly inflated parity, New Sterling would be slightly undervalued against other currencies, the reverse of the position in 1925-31. Consequently Britain would run a balance of payments surplus. However it would soon find its wealth swelled by the immense seigniorage on the world’s new reserve currency. After all, with the dollar in collapse, the euro either in collapse or disintegration or both, the yen burdened with excessive government debt and the renminbi domestically controlled and subject to government manipulation, the world’s traders and investors would have no substantial alternative.

The New Sovereign would be a solid store of value, backed by an economy that represented 4-5% of world trade, and with a financial system that after the Patriot Governor’s reforms would be globally unrivalled. Consequently, as in 1870-1914, the great majority of the world’s long-term financial transactions would become denominated in New Sterling and transacted through London. Investors, as well as holding New Sterling balances (exchangeable into New Sovereigns on demand at the Bank of England) would perceive New Sterling securities as offering higher yields and a much solider store of value than securities in other currencies, and a flight to quality would take place. Britain’s economy would be in the position, not of nineteenth century Britain with its vast Empire and free trade shibboleth, but of sixteenth century Venice, an economy of only moderate global importance that was nevertheless the world’s (or Europe’s in the case of Venice) leading entrepot for trade and wealth.

It is very unlikely indeed that the Bank of England’s Selection Committee will look for a Patriot Governor – this time around. But then Bolingbroke never really expected to be recalled by George II, to take over at the expense of the Whigs. He knew that a Tory revival would have to await new circumstances, but that his 1749 masterpiece might provide the intellectual basis for such a revival to occur.

There will be no Patriot Governor of the Bank of England while the current system is thought to work tolerably well – but that assumption may shortly become untenable.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)