How Post-War Normalization Caused the 1825 Crisis

Abstract

This paper finds that in 1824 and 1825 the Bank of England failed to understand the extent of its influence over economic activity and thus together with the Government made serious policy errors that led to the 1825 crisis. Specifically, I argue that the second post-war debt conversion caused a greater than 5% increase the base money supply, then drained the money back out of the economy over the course of less than a year. That is, the debt conversion whipsawed the economy monetarily, caused a boom and bust on the stock market, and ultimately the 1825 crisis. On the other hand, I also find that the Bank’s actions as lender of last resort when the crisis finally broke in 1825 were much more extensive and innovative than most commentators realize. After the crisis the Bank begin to actively stabilize the money supply, and I conclude that the crisis was a valuable learning experience for the Bank.

Keywords: Bank of England, 1825 Crisis, Government Debt, Discount Market, Lender of Last Resort, Monetary Policy

JEL Classification: E58, N13, N23