Panic of 1847

Last updated

The Panic of 1847 was a major British commercial and banking crisis, possibly triggered by the announcement in early March 1847 of government borrowing to pay for relief to combat the Great Famine in Ireland. [1] [2] It is also associated with the end of the 1840s railway industry boom and the failure of many non-bank lenders. [3] [4] The crisis was composed of two phases, one in April 1847 and one in October 1847, which was more serious and known as 'The Week of Terror'. [5] [6]

Contents

Background

As an attempt at stabilizing the British economy, the ministry of Robert Peel passed the Bank Charter Act of 1844. [7] This Act fixed a maximum quantity of Bank of England banknotes that could be in circulation at any one time, and guaranteed that definite reserve funds of gold and silver would be held in reserve to back up the money in circulation. [8] Furthermore, the Act required that the supply of money in circulation could be increased only when gold or silver reserves were proportionately increased after the fiduciary allowance. The Bank of England and the British currency were therefore at risk from drains of gold leaving the country or being withdrawn internally, which reduced the backing for its banknotes. In 1847, heavy drains occurred, and the Act was 'suspended' when the Bank of England was presented with a letter from the government indemnifying the Bank for a breach of the Act. [9] The crisis in the money market ended almost immediately, without any breach of the Act. [10]

The panic of 1847 cleared away a vast number of business houses and commercial firms, documented at the time by David Morier Evans, a correspondent for The Times. [11]

Progress of the Crises

From around £15m at the beginning of 1847, the bullion reserve of the Bank of England drained away, falling particularly sharply after the announcement of the Irish loan on 1 March 1847 to a trough of around £9m on 17 April 1847. [12] The Bank's reserve of notes it could legally circulate also reached low levels. On 17 April 1847 it was announced that the cost of famine relief would be transferred to local taxes in Ireland and the bullion reserve and note reserve began to rise. [13] However, capital outflows for investment in America and to pay for food imports to the United Kingdom overwhelmed the recovery, and both measures reached new low levels by October 1847. [14] Recovery only commenced when the government 'suspended' the Bank Charter Act 1844 by the letter from the Prime Minister and Chancellor of the Exchequer to the Governor of the Bank dated 25 October 1847. [15]

Explanations

Supporters of the gold standard and Monetarist theory have sought to minimize the impact of the 1847 crisis and relate it to the money supply. In particular, Neville Ward-Perkins described the crisis as artificial and overemphasized by those who had a direct interest. [16] [17] The following explanation by Spanish economist Jesus Huerta de Soto of the Austrian School is based in the Austrian Theory of the Business Cycle:

As of 1840 credit expansion resumed in the United Kingdom and spread throughout France and the United States. Thousands of miles of railroad track were built and the stock market entered upon a period of relentless growth which mostly favored railroad stock. Thus began a speculative movement which lasted until 1846, when economic crisis hit in Great Britain. It is interesting to note that on July 19, 1844, under the auspices of Peel, England had adopted the Bank Charter Act, which represented the triumph of Ricardo’s Currency School and prohibited the issuance of bills not completely backed by gold. Nevertheless this provision was not established in relation to deposits and loans, the volume of which increased five fold in only two years, which explains the spread of speculation and the severity of the crisis which erupted in 1846. [18]

Other explanations focus on the Banking School theory of financial crises, and relate the crisis to the Bank of England's management of interest rates, particularly in the situation of the apprehension in the money markets to the raising of the Irish loan. [19]

Outcomes

David Morier-Evans listed over 450 firms that failed between August 1847 and December 1848. [20] [21]

Frustrated that plans for a loan to relieve the Irish famine had failed Henry Grey, 3rd Earl Grey developed his plans for an alternative currency system to the Bank of England central bank model. It became known as a currency board and Grey set up the first one in cooperation with James Wilson and the Mauritian colonial government in Mauritius. [22] [23]

See also

Notes

  1. ↑ Read, Charles (2022). "Chapter 4". The Great Famine in Ireland and Britain's Financial Crisis. The Boydell Press. ISBN   9781800106284.
  2. ↑ Evans, D. Morier (1848). The Commercial Crisis 1847-1848. London: Letts. p. 56.
  3. ↑ Turner, John (2014). Banking in crisis : the rise and fall of British banking stability, 1800 to the present. Cambridge University Press. pp. 72–75. ISBN   9781139380874.
  4. ↑ Campbell, Gareth. (2010) “Two Bubbles and a Crisis : Britain in the 1840 s.”
  5. ↑ Read, Charles (2023). Calming the Storms: The Carry Trade, the Banking School and British Crises Since 1825. Switzerland: Palgrave Macmillan. pp. 138–142, 156. ISBN   9783031119132.
  6. ↑ R, Dornbusch, J. A. Frenkel (1984). The Gold Standard and the Bank of England on the Crisis of 1847 in A Retrospective on the Classical Gold Standard. Chicago: University of Chicago Press. pp. 233–276.{{cite book}}: CS1 maint: multiple names: authors list (link)
  7. ↑ See note 238 contained in the Collected Works of Karl Marx and Frederick Engels: Volume 12 (International Publishers: New York, 1979) pp. 669-670.
  8. ↑ See note 238 contained in the Collected Works of Karl Marx and Frederick Engels: Volume 12 pp. 669-670.
  9. ↑ John Turner, Banking in Crisis (Cambridge U. Press, 2014) pp. 74.
  10. ↑ id.; Glasner, David (1997). "Crisis of 1847" . In Glasner, David; Cooley, Thomas F. (eds.). Business cycles and depressions: an encyclopedia. New York: Garland Publishing. pp. 125–28. ISBN   0-8240-0944-4.
  11. ↑ Evans, David Morier (1849). The Commercial Crisis, 1847-1848: Being Facts and Figures. London.
  12. ↑ C. Read., Calming the Storms (Palgrave Macmillan, 2023) pp. 145-146
  13. ↑ Read, C. (2022). The Great Famine in Ireland and Britain's Financial Crisis. London: The Boydell Press. pp. 148–149. ISBN   9781783277278.
  14. ↑ C. Read., Calming the Storms (Palgrave Macmillan, 2023) pp. 146-147.
  15. ↑ C. Read., Calming the Storms (Palgrave Macmillan, 2023) p. 157.
  16. ↑ C. Read., Calming the Storms (Palgrave Macmillan, 2023) p. 75.
  17. ↑ C. N. Ward-Perkins, 'The Commercial Crisis 1847' Oxford Economic Papers (1950) 2 pp. 75-94.
  18. ↑ "Money, Bank Credit, and Economic Cycles" (PDF). 18 August 2014.
  19. ↑ C. Read., Calming the Storms (Palgrave Macmillan, 2023) p. 154.
  20. ↑ D. M. Evans, The Commercial Crisis of 1847 (London: Letts, 1848) Appendix.
  21. ↑ Read, Charles (2022). Calming the storms : the carry trade, the banking school and British financial crises since 1825. Cham, Switzerland. p. 153. ISBN   978-3-031-11914-9. OCLC   1360456914.{{cite book}}: CS1 maint: location missing publisher (link)
  22. ↑ Grey, Henry, 3rd Earl (1842). Thoughts on the Currency. London: Ridgeway.{{cite book}}: CS1 maint: multiple names: authors list (link) CS1 maint: numeric names: authors list (link)
  23. ↑ Read, Charles (2022). The Great Famine in Ireland and Britain's financial crisis. Woodbridge. pp. 236–244. ISBN   978-1-80010-627-7. OCLC   1365041253.{{cite book}}: CS1 maint: location missing publisher (link)

Related Research Articles

<span class="mw-page-title-main">Gold standard</span> Monetary system based on the value of gold

A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the late 1920s to 1932 as well as from 1944 until 1971 when the United States unilaterally terminated convertibility of the US dollar to gold, effectively ending the Bretton Woods system. Many states nonetheless hold substantial gold reserves.

<span class="mw-page-title-main">Panic of 1873</span> Financial crisis leading to economic depression in Europe and North America

The Panic of 1873 was a financial crisis that triggered an economic depression in Europe and North America that lasted from 1873 to 1877 or 1879 in France and in Britain. In Britain, the Panic started two decades of stagnation known as the "Long Depression" that weakened the country's economic leadership. In the United States, the Panic was known as the "Great Depression" until the events of 1929 and the early 1930s set a new standard.

<span class="mw-page-title-main">Panic of 1837</span> 19th-century United States financial crisis

The Panic of 1837 was a financial crisis in the United States that began a major depression, which lasted until the mid-1840s. Profits, prices, and wages dropped, westward expansion was stalled, unemployment rose, and pessimism abounded.

<span class="mw-page-title-main">Fractional-reserve banking</span> System of banking

Fractional-reserve banking is the system of banking in all countries worldwide, under which banks that take deposits from the public keep only part of their deposit liabilities in liquid assets as a reserve, typically lending the remainder to borrowers. Bank reserves are held as cash in the bank or as balances in the bank's account at the central bank. Fractional-reserve banking differs from the hypothetical alternative model, full-reserve banking, in which banks would keep all depositor funds on hand as reserves.

The Long Depression was a worldwide price and economic recession, beginning in 1873 and running either through March 1879, or 1896, depending on the metrics used. It was most severe in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution in the decade following the American Civil War. The episode was labeled the "Great Depression" at the time, and it held that designation until the Great Depression of the 1930s. Though it marked a period of general deflation and a general contraction, it did not have the severe economic retrogression of the Great Depression.

<span class="mw-page-title-main">Monetary base</span> Measure of money supply

In economics, the monetary base in a country is the total amount of money created by the central bank. This includes:

<span class="mw-page-title-main">Panic of 1857</span> American economic crisis

The Panic of 1857 was a financial crisis in the United States caused by the declining international economy and over-expansion of the domestic economy. Because of the invention of the telegraph by Samuel F. Morse in 1844, the Panic of 1857 was the first financial crisis to spread rapidly throughout the United States. The world economy was more interconnected by the 1850s, which made the Panic of 1857 the first worldwide economic crisis. In Britain, the Palmerston government circumvented the requirements of the Bank Charter Act 1844, which required gold and silver reserves to back up the amount of money in circulation. Surfacing news of this circumvention set off the Panic in Britain.

This history of central banking in the United States encompasses various bank regulations, from early wildcat banking practices through the present Federal Reserve System.

A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults. Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy.

<span class="mw-page-title-main">Bank Charter Act 1844</span> United Kingdom legislation

The Bank Charter Act 1844, sometimes referred to as the Peel Banking Act of 1844, was an Act of the Parliament of the United Kingdom, passed under the government of Robert Peel, which restricted the powers of British banks and gave exclusive note-issuing powers to the central Bank of England. It is one of the Bank of England Acts 1694 to 1892.

The British Currency School was a group of British economists, active in the 1840s and 1850s, who argued that the excessive issuing of banknotes was a major cause of price inflation. They believed that, in order to restrict circulation, issuers of new banknotes should be required to hold an equivalent value of gold as a reserve. This concept was also known as convertibility and the currency principle. They argued that prices were mostly based on quantity of currency in circulation, but did acknowledge that prices were also affected by deposits. Therefore, by controlling prices banks could limit outflow of gold.

<span class="mw-page-title-main">Money</span> Object or record accepted as payment

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.

<span class="mw-page-title-main">Ralph George Hawtrey</span>

Sir Ralph George Hawtrey was a British economist, and a close friend of John Maynard Keynes. He was a member of the Cambridge Apostles, the University of Cambridge intellectual secret society.

The Panic of 1825 was a stock market crash that started in the Bank of England, arising in part out of speculative investments in Latin America, including the imaginary country of Poyais. The crisis was felt most acutely in Britain, where it led to the closure of twelve banks. It was also manifest in the markets of Europe, Latin America and the United States. An infusion of gold reserves from the Banque de France saved the Bank of England from collapse. The panic has been called the first modern economic crisis not attributable to an external event, such as a war, and so the start of modern economic cycles. The Napoleonic Wars had been highly profitable for all sectors of the British financial system, and the expansionist monetary actions taken during transition from war to peace brought a surge of prosperity and speculative ventures. The stock market boom became a bubble and banks caught in the euphoria made risky loans.

<span class="mw-page-title-main">Panic of 1866</span> International financial downturn

The Panic of 1866 was an international financial downturn that accompanied the failure of Overend, Gurney and Company in London, and the corso forzoso abandonment of the silver standard in Italy.

The secondary banking crisis of 1973–1975 was a dramatic crash in British property prices that caused dozens of small ("secondary") lending banks to be threatened with bankruptcy.

The British Banking School was a group of 19th century economists from the United Kingdom who wrote on monetary and banking issues. The school arose in opposition to the British Currency School; they argued that currency issue could be naturally restricted by the desire of bank depositors to redeem their notes for gold. According to Jacob Viner the main members of the Banking School were Thomas Tooke, John Fullarton, James Wilson and J. W. Gilbart. They believed "The amount of paper notes in circulation was adequately controlled by the ordinary processes of competitive banking, and if the requirement of convertibility was maintained, could not exceed the needs of business for any appreciable length of time". Thus they opposed the requirement in the Bank Act of 1844 for a reserve requirement on banknotes.

This article details the history of banking in the United States. Banking in the United States is regulated by both the federal and state governments.

The real bills doctrine says that as long as bankers lend to businessmen only against the security (collateral) of short-term 30-, 60-, or 90-day commercial paper representing claims to real goods in the process of production, the loans will be just sufficient to finance the production of goods. The doctrine seeks to have real output determine its own means of purchase without affecting prices. Under the real bills doctrine, there is only one policy role for the central bank: lending commercial banks the necessary reserves against real customer bills, which the banks offer as collateral. The term "real bills doctrine" was coined by Lloyd Mints in his 1945 book, A History of Banking Theory. The doctrine was previously known as "the commercial loan theory of banking".

Charles Read is a British economic historian based at the University of Cambridge, where he is a fellow of Corpus Christi College, Cambridge. He is also a financial journalist who used to write and edit for The Economist.

References

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.