The Panic of 1825: The First Modern Financial Crisis

The Panic of 1825 is argued to have been the first modern financial crisis. There had been economic crises before, but not on this scale. At the beginning of 1825, Britain was thriving, but by the end of the year banks and businesses across the country had failed. The Panic of 1825 was a spectacular example of boom and bust that forced the British economic system to reform and established the basis of the modern economy.

But economics is boring

This year, I’ve been trying to make use of some of the research I’ve done for my novels, and putting it on here is the logical option. But who the hell wants to read about economics? It’s far from romantic. I hear you, and I have had this argument several times when deciding whether to write this up.

When I gather ideas for my novels, I always investigate historical events at the time the novel is set in case anything could affect my characters. As the title suggests, my Men of Trade series features MMCs who are businessmen. Two worked themselves out of poverty and the other two are part of long-standing family businesses, but all of them would have been affected by a financial crisis like this.

So, that meant I had to do the research. Seeing as it’s the 200^th anniversary of the event, there was no better time to share it with you. Bear with me. I’ll try to make it as interesting as possible.

Booming Britain

At the beginning of 1825, Britain was experiencing an economic boom. After the Napoleonic Wars, the country experienced a recession, but this reversed from 1819. By 1825, GDP was up by 25% and trade by 50%. Good harvests meant low food prices.

Panic of 1825 — Image of a one pound note issued in 1805. Public Domain

New companies were being floated on the stock market in huge numbers. Some were genuine. Some were utterly ridiculous. For example, The Resurrection Metal Company, which planned to salvage the cannonballs used at the Battle of Trafalgar 🙄. Speculation and investment surged, particularly in Latin American government bonds after they gained independence from Spain and Portugal.

The rich were getting richer, and the working classes could afford their food. It was all hunky-dory.

In February, King George IV announced:

“There was never a period in the history of this country when all the great interests of the nation were at the same time in so thriving a condition.”

Bust Britain

As usual, such a surge in prosperity led to over-confidence and investment in risky ventures.

From 1822, the government followed a policy of monetary expansion, promoted low interest rates and country banks (banks outside London) were encouraged to issue an abundance of bank notes. Country banks encouraged their clients to invest, the higher the risk the better, and borrowed money from London banks to fund these ventures.

By April 1825, the bubble had been primed, and the Bank of England tried to quell it by withdrawing bank notes from circulation and raising interest rates. Instead, it scared investors who tried to liquidate their holdings (sell their shares and get their money back) and confidence in the stock market wobbled.

On 18^th August, investors in a small Central American country called Poyais were disappointed to discover that they had been scammed. Fraudster Gregor MacGregor had invented the country and taken their money.

Finally, people considered whether their high-risk investments were as secure as they had been led to believe. More people sought to cash in their shares. The Bank of England didn’t help by raising interest rates again, and pop! Investment uncertainty, combined with a poor harvest, led to a stock market crash.

The Bank of England

At this time, the Bank of England was not the central bank. It had special authority over banking and banknotes, but it was a semi-private company. It had a monopoly on government contracts, and it had shareholders who wanted to protect their profits.

From September, banks across the country failed, and the Bank of England refused to be a lender of last resort (i.e. bail them out). Instead, it wanted to protect its reserves.

In December, the panic reached its peak. 63 country banks became insolvent and a run on London banks began (when a bank’s customers fear it is becoming insolvent and try to withdraw their deposits, but the bank doesn’t have the cash to cover it all, so they must close). In mid-December, 6 London banks closed.

To prevent further closures, the Bank of England finally bailed out other banks to the tune of £9 million. This almost made the institution insolvent, and it had to borrow from the Banque de France in April 1826. Oh, the shame! Don’t forget, they were at war only ten years prior.

Regulation and reform

The Panic of 1825 showed that no one was really in control of the economy. Many argued that the Bank of England contributed to the crisis by over-fuelling the monetary expansion and then acting too slowly to ease the panic.

Regardless, things needed to change. Reforms were implemented to centralise banking and better regulate the market. The Bank of England became the central bank but lost its monopoly on government contracts.

The reforms made the economy more flexible and less vulnerable to shocks, and the Bank of England became a lender of last resort.

However, many individuals lost a lot of money (if not their life savings) leading to financial hardship and poverty. A famous casualty was the poet and novelist, Sir Walter Scott. He had to declare bankruptcy and worked tirelessly to repay his creditors, which some argue led to his premature death. Those in trade, with goods and services to sell, didn’t fare as badly as speculators in foreign government debt or insurance.

How to make this romantic

Is it even possible to romanticise these catastrophic events? Not really, and I don’t even try. However, I hope to share my Men of Trade series with you soon, in which my heroes and heroines are affected by the panic of 1825 and the romantic entanglements that ensue.

Just in case you want to read more…