Panic of 1847

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]

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 The Bank of England and the British currency were therefore at risk from drains of gold leaving the country or being withdrawn internally, which reduced the backing for its banknotes.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

• Gold standard – Monetary system based on the value of gold
• Great Depression – Worldwide economic depression (1929–1939)
• Long Depression – Worldwide economic recession from 1873 to 1879

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.
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.
22. Grey, Henry, 3rd Earl (1842). Thoughts on the Currency. London: Ridgeway.
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.

References

• Mike Anson, David Bholat, Miao Kang, Kilian Rieder and Ryland Thomas. 2019. "The Bank of England and central bank credit rationing during the crisis of 1847: frosted glass or raised eyebrows?"
• Evans, David Morier (1849). The Commercial Crisis, 1847-1848: Being Facts and Figures. London.
• 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.
• Michael Bordo (2003). Stock Market Crashes, Productivity Boom Busts and Recessions: Some Historical Evidence.
• Arthur Crump, The English Manual Of Banking, Longmans, Green & Co, 2nd edition (1877).
• Kynaston, David (2017). Till Time's Last Sand: A History of the Bank of England, 1694–2013. New York: Bloomsbury. pp. 145–152. ISBN 978-1408868560.