1825: the first modern financial crisis

1825 was supposed to be a very good year for Britain. Trade was thriving. War on the continent had been averted. Harvests had been good for three years. The Bank of England was well-stocked with bullion. Optimism was in the air. In February, King George IV said, “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.” Alas, the King spoke too soon. As with other periods of prosperity in the third decade of the century — the South Sea Bubble bursting in 1720, the Great Depression bringing the party to a crashing close in 1929 — the roaring twenties were about to spin out of control. (One contemporary magazine compared the rising bubble to the South Sea disaster from a hundred years before.)

In 1824 Mexico and some South American states had been formally recognised as states by Britain, after they separated from Spain. This was a new market for the heady speculations of optimism to invest in: £150 million was invested in the first year of independence. Late 1824 was a time of frustrated investment more generally. Prices were rising in the speculation. Some of it was justified; but some commodities, like coffee, were well stocked compared to previous years and still saw huge price hikes. The Bank of England reduced interest payments on two bond issues, with the incendiary effect of putting money in the pocket of those who refused to move to the new issue and sounding the hunting horn for those who lost yield. The hunt for yield followed the scent to the gold mines of South America.

In November 1825, the crisis was reaching its tipping point. The peak would come over a week in mid-December. Demand for money was too high to be met: the Bank of England ran out of five- and ten-pound notes. Interest rates could not go above 5% by law, so there was a shortage of funds. Some merchants sold goods at a 30% discount just to raise cash. Public opinion was clamouring for harsh measures from Nanny. So, having passed out the money that funded the purchases, the bank started pulling it back. At the end of November, a country bank in Plymouth failed, followed by one in Yorkshire on 12 December after a £400,000 loan from the Bank of England.

Now the spiral became a whirl. Sixty-three country banks went insolvent after the Yorkshire bank failed. There was a run on the London banks, with six closing in mid-December. Pressure was on to convert notes — and like water running to the sea, that pressure all led to the same place. The Governor of the Bank of England told Parliament that no securities could be converted on 12-13th December, even exchequer bills and bank stock. In time-honoured fashion, merchants started calling for government support, blaming the policy of reduced bond payments and free trade for causing the crisis.

Lord Liverpool said no. He believed this was a speculative bubble. The government did not insure against speculation. And anyway, the gold standard was in place. Then on 14th December, the Bank of England swerved and gave out £5 million of loans. £51 million was given out in the last two weeks of December. It was all over by Boxing Day. Bank reserves had been running low and an exchange was made with France, swapping silver for gold, that brought £4 million worth of bullion into the country. The Bank of England found a box of old unused one- and two-pound notes in the basement, of which half a million were issued to country banks to avoid insolvency.

Another way of seeing the Panic of 1825 is that it wasn’t like panics of the past. There was no external cause of this bubble — no war, no weather, no pandemic. It was not a speculative mania. It took place in many fragmented investments — loans, insurance policies — made by individuals, often in good faith, in the new economic system. At the end of the Napoleonic Wars, Britain had introduced a new gold standard. To avoid a sudden stop in loans and note issues (after running the war on cheap money) the Bank designed a transition. First, they hoarded gold like Smaug, to keep prices high and prevent a run. Second, they brought out new low-yield stocks. Third, the government issued new bonds and started a big infrastructure programme. With all the extra money in the system, backed by gold, people started investing, post-war prosperity flourished, and George IV could yap complacently about the success of the economy. Now that gold payments resumed, the market for precious metals boomed. Hence all those investments in South American gold mines. That all sent capital overseas, and so the currency was becoming, in reality, a paper system. Letters and warnings were published in The Times, but all in vain. And so when the bank drew in its horns, the crash was inevitable.

This wasn’t, then, a rampant speculative bubble. It was a diversification crisis. So many people invested in so many different things and none of them knew enough about the rest. Many investments were sound. Many participants were not speculators. “The fundamental problem in the market,” as one scholar has written, “was not that investors were over-extending themselves but rather that they did not have enough information to appreciate how over-extended everyone else already was.” After the crash, the finance system started to be centralised, to avoid such situations in the future.

1825 is known as the first modern financial crisis. No single group could be blamed for what happened. It was a systemic event. It demonstrated, quite firmly, that there is no place or person at the centre of things, no-one who runs the market. 1825 was, in some senses, the year the modern economy started. But it wasn’t just in economics that 1825 changed the world. Politics and literature were reinvigorated too.

One of the people who definitely had been speculating was the young Benjamin Disraeli, who was not yet a statesman or anything like it. He borrowed and lost amazing amounts of money to buy shares, sometimes in countries that didn’t exist. Disraeli’s debts were so persistent that they dogged, and somewhat defined, the rest of his career. He once hid in a well to avoid bailiffs. When he was first elected to Parliament in 1837, he had to be smuggled in dressed as a cook to avoid his creditors. If he had ever lost his seat, the future Prime Minister would have spent time in debtors’ prison. Nothing concentrates the political mind, one imagines, as knowing that the alternative to a cabinet job and a country house is a spell in the Marshalsea. It may even be true that if Disraeli hadn't got into debt, he wouldn’t have stood for Parliament. Immunity is a great incentive.

The curly-haired speculator, Disraeli.

Rash speculation defined his political adventures. His political career was quite like his financial gamble. In 1825 he had borrowed and bought in league with publisher John Murray, and much politicking and bitterness ensued. Disraeli wrote pamphlets prompting the share purchases, and much of what he wrote was pure banana oil. Something similar was true about the way Disraeli presented his role in the purchase of the Suez Canal fifty years later, when he claimed to have faced down a resistant cabinet and bought the canal single-handed at short notice. Nothing of the sort was true. But just as the persona of the young Disraeli speculating on shares was part of an intense, almost Romantic posture and ambition in 1825, so his letters to Queen Victoria overstating and overdramatising his role and the opposition he faced from cabinet over the Suez purchase were part of a political identity in 1875. As Jane Ridley said: “Disraeli’s adventures of 1825-26 strikingly prefigure his later career. The allure of the press; the excitement of the ‘great business’, of dramatic cloak-and-dagger schemes and behind the scenes politico-financial coups… all these were to recur time and again throughout his mercurial career.”

Disraeli in 1825 had been a Byron wannabe. He dressed and posed just like his Romantic hero, right down to the hairstyle. His bump back to reality symbolises a wider Romantic decline after the crash. The reasons are not literary. Byron’s publisher was John Murray — who Disraeli’s speculations had nearly sent bust. Many other Romantic publishers outright failed. Many of them paid authors well and gave them cheap loans, putting themselves in debt to banks. When the financial system folded, so did they. It might be going too far to say that Disraeli’s invented puff-pages changed the literary market forever, but he certainly helped.

The failure of the high-end publishers opened up a new market for cheap editions. As Alexander J. Dick said, “The high end of the market for vellum-bound poetry and triple-decker novels fell off, and the lower end market for cheaper productions, pamphlets, miscellanies, sermons, and children’s books took off.” Rather than luxury editions, the market was now positioned for mass-market sales. The era of serialisation — novels published in instalments in magazines — had arrived. The road was clear for the great novels of the nineteenth century from writers like Charles Dickens. Financial crisis was a perpetual theme of Victorian fiction, as it was of the life of Benjamin Disraeli.

The lesson of 1825 is simple: don’t borrow money to make investments on the advice of a man who wears funny clothes.

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