Christmas special: Financial Crises in the 19th century

John Lewis.

Today we begin a 3-part series of posts telling the story of a period of financial boom and bust in British economic history, when crises hit with almost clockwork regularity:  1847, 1857 and 1866.  We delved deep into the Bank’s archives to reveal letters exchanged between Governors and Chancellors of the Exchequer temporarily suspending the law, read the diary entries of the people at the heart of the turmoil, and perused the Bank’s ledgers of the time to bring the crises to life.  Together these three episodes were crucial in shaping the evolution of the Bank’s role into what we now think of as a central bank; the lessons learned during this time resulted in half a century of financial stability and are as relevant now as they were then.

Back then, the Bank was private bank with its own shareholders but it had to operate under the 1844 Bank Charter Act and the Gold Standard.  A practical consequence of this arrangement was that any new currency issued by the Bank had to be backed by gold.

In each crisis, the Bank’s cash reserves dipped so low that there was a risk it could not honour its liabilities to the rest of the financial system. Each time the government was asked to grant an indemnity to the Bank to allow the issue of unbacked currency, in order to allow the Bank to expand its balance sheet, provide liquidity and stabilise the financial system.


Source: Huang and Thomas (2016)

Looking back at this trio of crises, we encounter many familiar themes along the way – excessive leverage, imprudent lending, credit crunches, money market freezes, systemic financial institutions, capital outflows, international spillovers, and emergency liquidity measures. If you don’t know how gold discoveries in far-away Australia affected 19th century UK monetary conditions, who the charmingly-named Bonamy Dobree was, or why Overend Gurney has a special (ignominious) place in central banking history, you will do by Wednesday…

John Lewis, Managing Editor

PS: If they inspire you to delve deeper into economic, financial and central banking history, the Bank’s daily accounts, court minutes and three centuries of macroeconomic data are all available online.