Panic of 1847

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The Panic of 1847 was a minor British banking crisis associated with the end of the 1840s railway industry boom and the failure of many non-banks. [1]

Railway Mania was an instance of speculative frenzy in the United Kingdom of Great Britain and Ireland in the 1840s. It followed a common pattern: as the price of railway shares increased, more and more money was poured in by speculators until the inevitable collapse. It reached its zenith in 1846, when no fewer than 272 Acts of Parliament were passed, setting up new railway companies, with the proposed routes totalling 9,500 miles (15,300 km) of new railway. Around a third of the railways authorised were never built – the companies either collapsed due to poor financial planning, were bought out by larger competitors before they could build their line, or turned out to be fraudulent enterprises to channel investors' money into other businesses.

Contents

Background

As a means of stabilizing the British economy, the ministry of Robert Peel passed the Bank Charter Act of 1844. [2] This Act fixed a maximum quantity of bank notes 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. [3] Furthermore, the Act required that the supply of money in circulation could only be increased when gold or silver reserves were proportionately increased. However, in 1847, the Act was suspended when the Bank of England was presented with a letter from the Prime Minister and Chancellor of the Exchequer indemnifying the Bank for a breach of the Act. [4] The crisis in the money market ended almost immediately without any breach of the Act. [5]

Robert Peel British Conservative statesman

Sir Robert Peel, 2nd Baronet, was a British Conservative statesman who served twice as Prime Minister of the United Kingdom and twice as Home Secretary. He is regarded as the father of modern British policing, owing to his founding of the Metropolitan Police Service. Peel was one of the founders of the modern Conservative Party.

Bank of England Central bank of the United Kingdom

The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government of the United Kingdom, it is the world's eighth-oldest bank. It was privately owned by stockholders from its foundation in 1694 until it was nationalised in 1946.

The panic of 1847 cleared away a vast number of unsound business houses,[ citation needed ] and trade generally became much more sound and healthy;[ citation needed ] this lasted until the year 1855.[ citation needed ] The following explanation by Spanish economist Jesus Huerta de Soto of the Austrian School is based in Austrian Theory of the Business Cycle:

Jesús Huerta de Soto professor of political economy and author

Jesús Huerta de Soto Ballester is a Spanish economist of the Austrian School. He is a professor in the Department of Applied Economics at King Juan Carlos University of Madrid, Spain and a Senior Fellow at the Ludwig von Mises Institute.

Austrian School school of economic thought

The Austrian School is a heterodox school of economic thought that is based on methodological individualism—the concept that social phenomena result exclusively from the motivations and actions of individuals.

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 backed 100 percent 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. [6]

See also

Notes

  1. John Turner, Banking in Crisis (Cambridge U. Press, 2014) pp. 72-75.
  2. See note 238 contained in the Collected Works of Karl Marx and Frederick Engels: Volume 12 (International Publishers: New York, 1979) pp. 669-670.
  3. See note 238 contained in the Collected Works of Karl Marx and Frederick Engels: Volume 12 pp. 669-670.
  4. John Turner, Banking in Crisis (Cambridge U. Press, 2014) pp. 74.
  5. 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.
  6. http://mises.org/books/desoto.pdf

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