Panic of 1825

Panic of 1825

London Panic of 1825

Centered in London, the banking panic of 1825 was the culmination of several years of euphoric investment in sovereign debt and precious metals that included one of the most remarkable swindles of all time: bonds sold in the name of a made-up country, called Poyais. The panic has all the features of a modern financial crisis—fluctuations in money growth, an investment bubble, a stock market crash, and bank runs.

More About Panic of 1825

  • The stock market crash that started in the Bank of England
  • Arising in from speculative investments in Latin America, including the imaginary country of Poyais
  • Mostly impacted England
  • Closed six London banks and sixty country banks in England
  • Also felt in  Europe, Latin America, and the United States.
  • An infusion of gold reserves from the Banque de France saved the Bank of England from complete collapse.

Notable Firsts
  • Referred to as the first modern economic crisis not attributable to an external event, such as a war, and thus the start of modern economic cycles
  • Also referred to as the first emerging markets crisis, first Latin American crisis

Key Events

Bank of England cut its discount rate in 1822 to stimulate the economy (first move since the early 1700s)

  • As part of this decision to lend against a wider range of collateral
  • Interest rates dropped, people went looking for income elsewhere and started to invest in Latin America

In England, depositors started to withdraw their deposits in gold (as was law), which resulted in a run on the banks.

  • Ultimately there was not enough gold to return all deposits
  • Rates had to be raised to attract more capital (gold) for investment into the country