The Panic of 1825 was a stock market crash that originated in the Bank of England, arising partly from speculative investments in Latin America, including the fictitious country of Poyais.
The crisis was felt most acutely in Britain, where it led to the closure of twelve banks, but also affected markets in Europe, Latin America and the United States.
The current view puts much of the fault of the crash on the banks for not collecting quality information, for performing inadequate surveillance, and for not doing simple due diligence on ventures.
In preparation for resuming convertibility, the Bank of England raised interest rates, amassed a stock of gold, and recalled notes from circulation.
[4] And while economists and historians generally provide non-conflicting accounts of the events which lead up to the crash, a number of different arguments have been made over what the most important factors were, with varying weight assigned by different experts.
[2] However, later academics have maintained that the Bank was not ignorant, but angry over the government's effort to restrict its autonomy and limit its control over its level of liabilities.
[5] Other analysts have emphasized not the war-to-peace transition but the role of British speculation, under expansionary monetary policy, in Latin American markets.
[1] Alexander Dick emphasizes that the crisis was unique in that it was not solely caused by external events like war or speculation in foreign markets, although those certainly played a role.
Instead, he argues that all problems arising from the transition from a war to a peacetime economy can be traced back to the vast and increasing "informational uncertainties" in existing institutions.
The British government built additional defences along England's southern coast and strengthened old ones, but these military investments came at a high cost.
The country could pursue this strategy because creditors considered Britain's stable parliamentary government reliable, which allowed it to issue a substantial quantity of debt.
[9] After Britain's victory at Battle of Waterloo in 1815 and Napoleon's defeat, Chancellor Nicholas Vansittart wanted to retain some form of the tax, favouring a reduction rather than complete abolition.
[6] In March the same year, the Bank of England also lifted a ban against issuing small notes, to enable expansionary monetary action.
In practice, though, the Bank's power remained intact so long as the government still relied on it for managing remittances and issuing debt during the war.
[2] London's capital markets responded to the retirement of high-yielding government bonds by producing what Larry Neal refers to as a "bewildering array" of new financial assets.
[11] The reinstatement of the gold standard entailed a contraction of the money supply and a tightening of bank lending which made it difficult for merchants to raise capital.
Publishers who followed the Romantic-era traditions of offering authors handsome advances were often in debt to banks and other creditors, and this practice left them vulnerable during the crisis.
Older publishers such as John Murray, Constable and Ballantyne, Hurst and Robinson, and Taylor and Hessey suffered during the crisis, and some even collapsed entirely.
High end works were in declining demand, but the market for cheaper productions, pamphlets, and children's books was rapidly developing.
[13] The crash led to such a frenzy that London bankers and their clients called for the government to protect their credit by suspending convertibility, as it had with the Bank Restriction Act of 1797.
While writers of the time like James McCulloch had at first intimated that the problems arose because of the decision to imprudently abandon the gold standard, he later experienced a shift in perspective which was evident in his writing.
[6] By the time he published "The Late Crisis in the Money Market Impartially Considered", he began to think that the crash was not attributable to greed-driven bankers but to a diversified financial system.
[6] While the crisis is now thought to have been caused by the transition process between war and peacetime economies, it was – at the time – blamed primarily on weak small country bankers speculating unwisely.
George Eliot's novel Middlemarch, written in 1870 but set in 1830, alludes to the crisis as well as the impact of the crash on the lives of individuals in Victorian England.