Panic of 1866

Last updated
Cartoon from Fun magazine, 1866. The caption reads 'The Old Lady of Threadneedle Street -- "Now, my young friends, let this be a warning to you against rash speculation. What would you have done but for my little savings?"' Political cartoon from Fun magazine about Overend Gurney.jpg
Cartoon from Fun magazine, 1866. The caption reads 'The Old Lady of Threadneedle Street — "Now, my young friends, let this be a warning to you against rash speculation. What would you have done but for my little savings?"'

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.

Contents

In Britain, the economic impacts are held partially responsible for public agitation for political reform in the months leading up to the 1867 Reform Act. The crisis led to a sharp rise in unemployment to 8% and a subsequent fall in wages across the country. Similar to the "knife and fork" motives of Chartism in the late 1830s and 1840s, the financial pressure on the British working class led to rising support for greater representation of the people. Groups such as the Reform League saw rapid increases in membership and the organisation spearheaded multiple demonstrations against the political establishment such as the Hyde Park riot of 1866. Ultimately the popular pressure that arose from the banking crisis and the recession that followed can be held partly responsible for the enfranchisement of 1.1 million people as a result of Disraeli's reform bill. [1]

The Panic decimated shipbuilding in London, and the Millwall Iron Works holding company collapsed. Less than 17% of the joint-stock banks formed since 1844 weathered this tumult. [2] The Companies Act 1862 created a financial boom which laid the groundwork for the larger banks of British finance during the latter half of the 19th century. [3]

The primary importance of the expansion of credit was its role in foreign trade. Historians P. J. Cain and A. G. Hopkins note that "gentlemanly capitalism" (a class-conscious form of white-collar work in finance, insurance, shipping and the Empire) was the key to the growth of the Empire and its economic growth beginning in 1850. [4] Historian David Kynaston notes the shift in the discount bills in the 1860s, particularly to finance supplies for the American Civil War, [5] and Richard Roberts describes the 1860s, 1870s and 1880s as the "internationalisation of the discount market". [6]

According to a 2022 study, "countries exposed to bank failures in London immediately exported significantly less and did not recover their lost growth relative to unexposed places. Their market shares within each destination also remained significantly lower for four decades." [7]

Bank of England

The Panic of 1866 provides the key event recognising this shift. In the 12 May 1866 issue of The Economist , Walter Bagehot noted that the Bank of England's refusal to lend with Consol bonds as collateral was troubling. The following week he also wrote that this refusal had caused further panic, as well as that the bankers did not consider the Bank of England to be a government agency.

By issuing its letter suspending the Bank Charter Act 1844, [8] however, it revealed its backing by the Government and was "confirming the popular conviction that the Government is behind the Bank, and will help it when wanted". [9]

On 12 May 1866, Bagehot wrote that the panic now meant "a state in which there is confidence in the Bank of England and in nothing but the Bank of England", [10] highlighting the conflict between the Bank's role in maintaining the liquidity of the domestic market and in maintaining its reserves to guarantee convertibility for foreign currency exchange. [11] In a panic, not only did the need to maintain reserves mandated by the Bank Charter Act 1844 lead to hesitation by the Bank, but also the suspension of its requirements confused foreign investors, who believed the Bank had suspended payments, which led to concurrent massive foreign withdrawals. [12]

The Bank of England adopted Bagehot's solution, which was an explicit policy of free offers to lend at high discount rates. This policy rebuilt the Bank's reserves. [13] It also moderated and refined its use of monetary policy to influence capital flows in and out of the United Kingdom. [14] [15]

The Bank of England's response to the 1866 financial crisis helped make the sterling pound an international currency. [16]

See also

Further reading

Related Research Articles

<span class="mw-page-title-main">HM Treasury</span> Ministerial department of the UK Government

His Majesty's Treasury, occasionally referred to as the Exchequer, or more informally the Treasury, is a department of His Majesty's Government responsible for developing and executing the government's public finance policy and economic policy. The Treasury maintains the Online System for Central Accounting and Reporting (OSCAR), the replacement for the Combined Online Information System (COINS), which itemises departmental spending under thousands of category headings, and from which the Whole of Government Accounts (WGA) annual financial statements are produced.

<span class="mw-page-title-main">Global financial system</span> Global framework for capital flows

The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic action that together facilitate international flows of financial capital for purposes of investment and trade financing. Since emerging in the late 19th century during the first modern wave of economic globalization, its evolution is marked by the establishment of central banks, multilateral treaties, and intergovernmental organizations aimed at improving the transparency, regulation, and effectiveness of international markets. In the late 1800s, world migration and communication technology facilitated unprecedented growth in international trade and investment. At the onset of World War I, trade contracted as foreign exchange markets became paralyzed by money market illiquidity. Countries sought to defend against external shocks with protectionist policies and trade virtually halted by 1933, worsening the effects of the global Great Depression until a series of reciprocal trade agreements slowly reduced tariffs worldwide. Efforts to revamp the international monetary system after World War II improved exchange rate stability, fostering record growth in global finance.

<span class="mw-page-title-main">Lender of last resort</span> Government guarantee to provide liquidity to financial institutions

In public finance, a lender of last resort (LOLR) is the institution in a financial system that acts as the provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank lending market when other facilities or such sources have been exhausted. It is, in effect, a government guarantee to provide liquidity to financial institutions. Since the beginning of the 20th century, most central banks have been providers of lender of last resort facilities, and their functions usually also include ensuring liquidity in the financial market in general.

<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.

Overend, Gurney & Company was a London wholesale discount bank, known as "the bankers' bank", which collapsed in 1866 owing about £11 million, equivalent to £1,084 million in 2021. The collapse of the institution triggered a banking panic.

<span class="mw-page-title-main">John Hubbard, 1st Baron Addington</span> British financier and politician

John Gellibrand Hubbard, 1st Baron Addington PC, was a City of London financier and a Conservative Party politician.

The carry of an asset is the return obtained from holding it, or the cost of holding it. For instance, commodities are usually negative carry assets, as they incur storage costs or may suffer from depreciation. But in some circumstances, appropriately hedged commodities can be positive carry assets if the forward/futures market is willing to pay sufficient premium for future delivery. This can also refer to a trade with more than one leg, where you earn the spread between borrowing a low carry asset and lending a high carry one; such as gold during financial crisis, due to its safe haven quality.

<i>Lombard Street: A Description of the Money Market</i> 1873 book on finance by Walter Bagehot

Lombard Street: A Description of the Money Market (1873) is a book by Walter Bagehot. Bagehot was one of the first writers to describe and explain the world of international and corporate finance, banking, and money in understandable language. The book was initially printed in Great Britain by Henry S. King & Co. in 1873.

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. Nationwide gold and silver confiscation ensued and 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.

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. It is also associated with the end of the 1840s railway industry boom and the failure of many non-bank lenders. 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'.

<span class="mw-page-title-main">Diamond–Dybvig model</span> Theoretical description of bank runs and financial crises

The Diamond–Dybvig model is an influential model of bank runs and related financial crises. The model shows how banks' mix of illiquid assets and liquid liabilities may give rise to self-fulfilling panics among depositors. Diamond and Dybvig, along with Ben Bernanke, were the recipients of the 2022 Nobel Prize in Economics for their work on the Diamond-Dybvig model.

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.

The Panic of 1930 was a financial crisis that occurred in the United States which led to a severe decline in the money supply during a period of declining economic activity. A series of bank failures from agricultural areas during this time period sparked panic among depositors which led to widespread bank runs across the country.

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

  1. ↑ Malcolm Pearce and Geoffrey Stewart, British Political History 1867–1990, published 1992
  2. ↑ George Robb, White-Collar Crime in Modern England: Financial Fraud and Business Morality, 1845–1929 (Cambridge: Cambridge Univ. Press, 1992), p. 71.
  3. ↑ Joshua Gooch, "On Black Friday, 11 May 1866", in BRANCH: Britain, Representation and Nineteenth-Century History, ed. Dino Franco Felluga. Downloaded 23 Feb. 2016, p. 4.
  4. ↑ P. J. Cain and A. G. Hopkins, British Imperialism: Innovation and Expansion, 1688-1890 (New York: Longman, 1993), p. 170.
  5. ↑ David Kynaston, The City of London, A World of Its Own, 1815–1890 (London: Chatto, 1994), p. 225.
  6. ↑ Richard Roberts, "The Bank of England and the City", in The Bank of England: Money, Power and Influence, 1694–1994 (Oxford: Clarendon Press, 1995), p. 159.
  7. ↑ Xu, Chenzi (2022). "Reshaping Global Trade: the Immediate and Long-Run Effects of Bank Failures". Quarterly Journal of Economics. 137 (4): 2107–2161. doi: 10.1093/qje/qjac016 .
  8. ↑ Suspension of the Bank Charter Act 1844 meant suspending the ratio of note issue in excess of 14 million pounds to gold, an action that typically had more effect on the perception of credit than on note availability.
  9. ↑ W. T. C. King, History of the London Discount Market (london: Frank Cass, 1935), p. 29.
  10. ↑ Walter Bagehot, "What a Panic Is and How It Might Be Mitigated". The Economist, vol. 24, No 1185 (12 May 1866), p.554.
  11. ↑ Gooch, op. cit., p. 5.
  12. ↑ Walter Bagehot, Lombard Street (London: Morgan, 1873), p. 25.
  13. ↑ Gooch, op. cit., p. 5.
  14. ↑ Read, Charles (2022). Calming the storms : the carry trade, the banking school and British financial crises since 1825. Cham, Switzerland. pp. 204–206, 235–238. ISBN   978-3-031-11914-9. OCLC   1360456914.{{cite book}}: CS1 maint: location missing publisher (link)
  15. ↑ Bonamy Price. (1878) Chapters on Practical Political Economy. Kegan Paul. pp. 491-492.
  16. ↑ Flandreau, Marc; Ugolini, Stefano (2014), "The Crisis of 1866", British Financial Crises since 1825, Oxford: Oxford University Press, doi:10.1093/acprof:oso/9780199688661.003.0005, ISBN   978-0-19-968866-1
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.