Two centuries later, the financial crisis of 1825 has yet to reveal all its secrets. Often regarded as the first modern financial crisis, it brought together a speculative bubble in capital markets, a banking panic that escalated into a major systemic collapse (Turner 2014), and a contagion that spread both nationally and internationally.
The study of this episode cannot be confined to the stock market crash and the ensuing systemic crisis; understanding the post-crisis developments is equally crucial. The 1825 crisis was a formative moment that catalyzed the structuring and regulation of the British financial market. Its aftermath marked a decisive turning point: the banking system underwent profound reorganization, while the Bank of England began to define and assume its role as guarantor of financial stability and lender of last resort. At the same time, the capital market gradually moved beyond public debt, opening up to a broader diversification of investments.
This special issue marks the bicentennial of a foundational crisis. It seeks to revisit this episode through economic, historical, and institutional lenses, shedding light on the enduring lessons the 1825 crisis continues to offer for understanding the recurring dynamics of speculation, banking panic, and regulation that still shape contemporary financial systems.
This crisis prompted extensive analysis from contemporary economists, particularly regarding its causes and the regulatory measures needed to prevent or mitigate its effects. It remains today a key subject of study for historians and economists seeking to understand the cyclical patterns of financial crisis and the transformation of economic institutions over time.
Anatomy of a Speculative Bubble: The 1825 Boom and Bust
In many respects, the boom and bust of 1825 fit the Kindleberger–Minsky model, grounded in the cyclical dynamics of speculative manias — a succession of phases ranging from euphoria to panic, passing through credit expansion and its abrupt tightening (Kindleberger 1978; Minsky 1986, 1987).
According to this framework, a financial crisis begins with a displacement — a positive shock such as an innovation, the opening of trade, the return of peace, or a new monetary policy — which attracts capital and stimulates investment. This is followed by the boom phase, during which credit becomes abundant and inexpensive, driving up asset prices across the board. Euphoria then takes hold: investors believe in endless prosperity, borrowing surges, and speculation runs wild. Next comes distress, as the first doubts arise and some actors attempt to liquidate their positions, triggering falling prices. Finally, panic (or crash) sets in, characterized by forced sales, cascading bank failures, and a collapse of credit — until an authority, often a central bank, steps in as lender of last resort to restore confidence.
Following the Napoleonic Wars (1803–1815), the British government sought to restore sound public finances. This policy unfolded in a context of declining tax revenues, particularly after the suspension in 1816 of the income tax, which had been introduced on a temporary basis in 1799 by Prime Minister William Pitt to finance the war effort against revolutionary France.
The Treasury sought to reduce the burden of public debt. It conducted open market operations by issuing short-term Exchequer bills to the Bank of England in order to repay long-term debt, particularly Consols (Neal, 1989). In addition, the government carried out debt conversion operations: 5% and 4% securities were converted into lower-yield bonds—4% and 3.5%, respectively—to reduce the cost of servicing the debt.
Furthermore, in 1823, the Bank of England repurchased a portion of the public debt issued by the Treasury to finance military pensions (the Dead Weight Debt), after the government failed to place it with the public.
All these measures, implemented with the support of the Bank of England, helped restore balance to the public finances. Meanwhile, the Bank of England substantially increased its holdings of government securities: by February 1825, these holdings were 50% higher than their low point in February 1822 (Clapham 1944).
However, this policy led to a decline in the yield on government securities, which had until then been regarded as the preferred assets of both British and foreign investors in the capital market. Confronted with this erosion of profitability, these investors redirected their funds toward higher-yielding investments (Jackson 2018; Neal 1998).
This situation coincided with an expansion of liquidity in the money market and the emergence of new investment opportunities—chief among them the sovereign debt securities issued by the newly independent Latin American republics, mining companies operating in these former Spanish colonies, and a multitude of new joint-stock enterprises founded in London. Financial intermediation by brokers and banks played a decisive role in channeling capital toward these assets (Flandreau and Flores 2009).
A speculative frenzy soon took hold, accompanied by a flood of dubious ventures and outright frauds—typical symptoms of major speculative manias (Kindleberger 1978). In October 1822, Gregor MacGregor, a Scottish adventurer, issued bonds on behalf of a fictitious government—the so-called Republic of Poyais—allegedly located in British Honduras. These securities were listed at 81.5% of par value, nearly matching the price of genuine Peruvian and Chilean bonds (Neal 1998).
Speculation on the shares issued by Latin American mining companies was also driven by strong leverage: investors paid only small instalments, spread over time. As Juglar (1862) reports, “the shares of Anglo-Mexican mines, on which only £10 had been paid, were quoted at £43 on December 10, 1824, and £150 on January 11, 1825.” He adds:
All kinds of projects were deemed suitable for the use of capital: pearl fishing off the coast of Colombia, the colonization of uncultivated lands, life and fire insurance companies, shipping companies, breweries, coal docks; one company was even formed to drain the Red Sea in order to recover the gold left behind by the Egyptians after the passage of the Hebrews — and it found subscribers! (Juglar 1862)
The turning point came when reports about the dubious nature of these investments began to spread, prompting investors to liquidate their positions (Quinn and Turner 2020). In April 1825, the Bank of England initiated a monetary contraction through new open market operations, selling Exchequer bills and withdrawing banknotes from circulation (Clapham, 1944). The bubble burst, unleashing a wave of banking panic and a series of sovereign defaults, including those of Peru in April 1826 and Colombia in May of the same year (Flandreau and Flores 2009).
Bank Runs and Bailout
Following the resumption of gold convertibility in May 1821, the British economy entered a phase of expansion supported by an accommodative monetary policy implemented by the Bank of England. This policy was characterized by low interest rates and abundant liquidity, within a climate of widespread confidence among economic actors (Jackson 2018). In June 1822, the Bank of England lowered its discount rate from 5% to 4%, a level it maintained until December 1825 (Clapham 1944).
Some authors have argued that this monetary expansion was the root cause of the speculative bubble. Béraud (2013) notes that Tooke (1826, 1836) and McCulloch (1826a, 1826b) explained the speculation respectively by the fall in interest rates—resulting from the excessive issuance of banknotes and credit linked to the Bank of England’s policy—and by the over-issuance of notes by country banks. According to Béraud, John Stuart Mill (1963-91) took a distinctive stance: he attributed the 1825 collapse to speculation in reckless ventures but considered that overtrading was driven by the circulation of commercial paper—that is, by credit. It was this credit, in his view, that allowed speculation to spread. Mill maintained that the crisis would have occurred even under a system based solely on metallic money. The turning point came when confidence crumbled and credit contracted.
The monetary contraction initiated by the Bank of England in April 1825, combined with falling asset prices in the financial markets, triggered a wave of panic in the banking sector. Country banks, facing liquidity shortages, turned to their London correspondents, who in turn appealed to the Bank of England. A wave of bank failures followed—116 by the end of 1826 (Neal 1998).
Confronted with these cascading failures and mounting pressure at its counters, the Bank of England reversed its policy in mid-December 1825 and began freely discounting bills of exchange, Exchequer bills, and other securities. Bagehot (1873), in Lombard Street, recounts this episode:
The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. ‘We lent it,’ said Mr. Harman, on behalf of the Bank of England, ‘by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power.’ After a day or two of this treatment, the entire panic subsided, and the ‘City’ was quite calm. (Bagehot 1873)
The Bank of England’s gold and coin reserves fell from £10,721,000 on December 24, 1824, to £1,260,000 on December 25, 1825 (Bagehot 1873). Thanks to the Bank’s support policy and the influx of gold from France (Flandreau and Flores 2009), the crisis was eventually contained, and the panic subsided by mid-1826.
The Reconstruction of the Financial Market after the 1825 Crisis
The Bank of England’s Early Steps in Learning its Role in Financial Stability
In Lombard Street, Bagehot (1873) highlights the crucial policy reversal of the Bank of England during the 1825 crisis. The Bank initially pursued monetary contraction to preserve its reserves, but later changed course in response to the magnitude of the panic. In this respect, the 1825 crisis marked a decisive stage in the Bank’s learning of its role as guarantor of financial stability and lender of last resort.
During the panic of 1825, the Bank of England at first acted as unwisely as it was possible to act. By every means it tried to restrict its advances. The reserve being very small, it endeavoured to protect that reserve by lending as little as possible. The result was a period of frantic and almost inconceivable violence; scarcely any one knew whom to trust; credit was almost suspended; the country was, as Mr. Huskisson expressed it, within twenty-four hours of a state of barter. (Bagehot 1873)
Bagehot then emphasizes the success of the Bank’s reversal, which—after a delayed response—ultimately adopted the right principles:
The success of the Bank of England on this occasion was owing to its complete adoption of right principles. The Bank adopted these principles very late; but when it adopted them, it adopted them completely. (Bagehot 1873)
The secret rescue attempt of the bank Pole, Thornton & Co. exemplified the shortcomings of the Bank of England’s initial approach. In early December 1825, the Bank covertly injected £400,000 into the struggling institution. According to Neal (1998), a true lender of last resort would instead have made this intervention public to restore confidence in the banking system. The liquidity injection, however, proved insufficient: depositor panic persisted, and Pole, Thornton & Co. collapsed on December 13, 1825, bringing down several of its country correspondent banks.
During the 1825 crisis, the Bank of England applied the principles of the lender of last resort only belatedly and incompletely. In early December 1825, it raised its discount rate from 4% to 5%, in line with the principle of lending at a penalty rate, but it failed to inject liquidity freely and readily enough to halt the crisis and restore confidence (Bordo 1998).
This delayed response can be explained by the Bank’s unique institutional context, divided between its private interests and its public responsibilities. As a privately owned joint-stock company, the Bank of England faced a dilemma between pursuing profitability on behalf of its shareholders and fulfilling its obligations to the state—such as financing the Treasury, restructuring public debt, and managing the national gold reserve.
The absence of a clear definition of its responsibilities—particularly regarding financial stability, a key element of sound governance (Bentemessek Kahia and Gomez Betancourt 2024)—led to a delayed response in managing the 1825 crisis.
During the 1825 crisis, the Bank of England did not yet fully assume the role of lender of last resort; nevertheless, this episode marked a crucial stage in the gradual articulation of that role and in the recognition of its importance for the stability of the British financial system. This learning process was strengthened in 1857 and clearly affirmed in 1866—the year that, according to Bagehot (1873), witnessed the first fully realized implementation of the lender-of-last-resort function (Bentemessek Kahia and Gomez Betancourt 2024).
The Restructuring of the Money and Capital Markets After the 1825 Crisis
The 1825 crisis exposed the structural weaknesses of the British banking system, characterized by a large number of undercapitalized banks and a fragmented network organized as independent partnerships rather than as an integrated structure of parent companies and subsidiaries. Such an organization would have better aligned interests, reduced information asymmetries, and strengthened supervisory mechanisms within the banking system.
The ensuing banking reform aimed to address these structural weaknesses. From this perspective, the 1825 crisis marked a major turning point in the restructuring of the British banking market (King 1936).
Considering the 1826 banking reform, note-issuing banks were authorized, beginning in July 1826, to organize as joint-stock companies with no limit on the number of shareholders—whereas they had previously been restricted to a maximum of six shareholders —and to establish themselves beyond a 65-mile radius of London. However, the Bank of England retained its exclusive privilege of note issuance within this area, remaining the only institution permitted to issue banknotes and to have more than six shareholders (de Boyer 2003).
This reform underscored the importance of bank solvency, now supported by the equity capital contributed by shareholders. Joint-stock banks were established under the principle of unlimited shareholder liability, which strengthened public confidence: depositors knew that, in the event of bankruptcy, shareholders remained personally responsible for losses, thereby ensuring their compensation. Moreover, lifting the restriction on the number of shareholders increased banks’ capitalization, enhancing their resilience to liquidity shocks and improving the overall stability of the banking system. Together, these changes helped restore confidence in the financial system while encouraging institutions to reduce their risk exposure and diversify their sources of funding.
Furthermore, this institutional transformation was accompanied by improvements in the governance of joint-stock banks, notably through the strengthening of their boards of directors, which were responsible for maintaining the financial balance inherent to institutions with unlimited liability. These boards oversaw the admission and transfer of shareholders to prevent the dilution of their average wealth and to preserve a strong capital base. This arrangement sought to reinforce banks’ solvency, increase their capacity to absorb shocks, and safeguard the stability of the banking system, while bolstering depositor confidence (Turner 2014).
Finally, the 1826 banking reform deeply reorganized the British banking market by authorizing the Bank of England to open provincial branches. This development effectively challenged the partnership model that had until then dominated the banking landscape.
This new structure strengthened banking supervision and reduced information asymmetries between London and the provinces. The reform introduced a decentralization of supervisory functions at the local level while maintaining a hierarchical link with the London center—a connection that had been lacking in the former correspondent system between London and country banks. These branches thus became key financial intermediaries, capable of assessing borrowers’ creditworthiness and preventing imbalances likely to lead to new crises (Bordo 1998; Neal 1998).
The post-1825 period also provided an opportunity to transform the British capital market, which began to gradually move away from public debt. This shift, already initiated by the Treasury and the Bank of England, led to a decline in investor interest in government securities, whose yields had fallen as a result of measures implemented to ease the debt burden accumulated after the Napoleonic Wars. The reorientation intensified with the repeal of the 1720 Bubble Act, which authorized the creation of banks and joint-stock companies, paving the way for the rise of private capital and the diversification of the economy’s sources of financing beyond the public debt market alone.
Two Centuries On: Revisiting the Legacy of the 1825 Financial Crisis
This special issue, entitled “Two Centuries On: Revisiting the Legacy of the 1825 Financial Crisis,” offers an opportunity to take a deep look at this foundational crisis of modern financial capitalism, questioning what it has not yet fully revealed. The introduction of this special issue highlights the persistence of ongoing debates surrounding the diversity of its causes, the complexity of its manifestations, and the multiplicity of its economic, financial, and institutional effects. It emphasizes that, two centuries later, the 1825 crisis still raises questions about its true origins, its mechanisms of propagation, and its lasting repercussions on the evolution of the British banking system and capital market. Both financial history analysis and the history of monetary thought offer complementary and valuable insights, helping to uncover the untold story of the 1825 crisis.
This issue is organized as follows:
In his article, Andrew Odlyzko questions the role the Bank of England played as a lender of last resort during the crisis. He shows that, despite strong incentives that could have prompted its directors to intervene in this capacity, informal constraints prevented them from doing so, thereby depriving the Bank of substantial potential profits.
In the following article, Javier San Julián analyzes the parliamentary debates that took place in Britain at the time of the crisis regarding its causes and highlights the important role played by economist parliamentarians. These debates ultimately led to structural reforms that reorganized the British banking system after the crisis.
In his contribution, José Manuel Menudo challenges the “Anglo-centric” narratives of the crisis and, drawing on archival pamphlets, economic correspondence, and periodicals, sheds light on the international dissemination of a Hispanic interpretation of the causes of the 1825 crisis, as articulated by the Spanish economist Flórez Estrada. This analysis advocates for a conception of economic thought as global, multilingual, and embedded in its geopolitical context.
Claire Silvant’s article seeks to identify how this crisis influenced the monetary thought of French liberal economists — from Jean-Baptiste Say to Clément Juglar, including Adolphe Blanqui and Charles Coquelin — both in their theoretical views of economic crises, seen either as inevitable short-term disruptions in a long process of prosperity or as symptoms of deeper imbalances, and in their recommendations on monetary and banking regulation.
Then, the article by Matthew Smith analyzes Thomas Tooke’s interpretation of the 1825 crisis in his Considerations and highlights the influence of this episode on the development of his thinking regarding interest rates, the policy of the Bank of England, and banking regulation in the United Kingdom.
The article by Matari Pierre Manigat examines Tugan-Baranovsky’s analysis of the 1825 crisis, which built on Marx’s comments on this same episode to further develop his hypotheses on overproduction, financial speculation, and the international transmission of crises.
Lastly, Carolyn Sissoko highlights the lessons learned from the 1825 crisis and the extent to which it contributed to advances in macroeconomics—specifically by clarifying the Bank of England’s influence on nationwide credit expansion and its connection to macroeconomic fluctuations, by demonstrating to the Bank the importance of stabilizing the money supply, and by deepening the understanding of the lender of last resort’s role.
Competing Interests
The author has no competing interests to declare.
References
Bagehot, Walter. 1873. Lombard Street: A Description of the Money Market. London: Henry S. King.
Bentemessek Kahia, Nesrine, and Rebeca Gomez Betancourt. 2024. “Walter Bagehot on Central Bank Governance: Lessons from Lombard Street (1873).” European Journal of the History of Economic Thought 31 (5): 708–29. http://doi.org/10.1080/09672567.2024.2407326.
Béraud, Alain. 2013. “Mill et la crise de 1825.” Revue d’économie politique 123 (2): 237–64.
Bordo, Michael D. 1998. “Commentary on ‘The Financial Crisis of 1825 and the Restructuring of the British Financial System.’” Review (Federal Reserve Bank of St. Louis) 80 (3, May–June): 77–82.
Clapham, John H. 1944. The Bank of England: A History, 1694–1914. 2 vols. Cambridge: Cambridge University Press.
de Boyer des Roches, Jérôme. 2003. La pensée monétaire: Histoire et analyse. Les Solos.
Flandreau, Marc, and Juan H. Flores. 2009. “Bonds and Brands: Foundations of Sovereign Debt Markets, 1820–1830.” The Journal of Economic History 69 (3): 646–84. http://doi.org/10.1017/S0022050709001089.
Jackson, Trevor. 2018. “Avant la coopération entre banques centrales: Endiguer la panique de 1825.” Revue d’économie financière 132 (4): 267–71. http://doi.org/10.3917/ecofi.132.0267.
Juglar, Clément. 1862. Des crises commerciales et de leur retour périodique en France, en Angleterre et aux États-Unis. Paris: Guillaumin.
Kindleberger, Charles P. 1978. Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books.
King, Wilfred T. C. 1936. History of the London Discount Market. London: George Routledge & Sons.
McCulloch, John Ramsay. 1826a. “Thoughts on Banking.” The Edinburgh Review 43 (86): 263–98.
McCulloch, John Ramsay. 1826b. “The Late Crisis in the Money Market Impartially Considered.” The Edinburgh Review 44 (87): 70–93.
Mill, John Stuart. 1963–91. Collected Works of John Stuart Mill. Edited by M. Robson. Toronto: University of Toronto Press.
Minsky, Hyman P. 1986. Stabilizing an Unstable Economy. New Haven, CT: Yale University Press.
Minsky, Hyman P. 1987. “Review of Financial Crises and the World Banking System, edited by F. Capie and G. E. Wood.” Journal of Economic Literature 25 (3): 1341–42.
Neal, Larry. 1998. “The Financial Crisis of 1825 and the Restructuring of the British Financial System.” Review (Federal Reserve Bank of St. Louis) 80 (3, May–June): 53–76.
Quinn, William, and John D. Turner. 2020. Boom and Bust: A Global History of Financial Bubbles. Cambridge: Cambridge University Press.
Tooke, Thomas. 1826. Considerations on the State of Currency. London: John Murray.
Tooke, Thomas. 1838. A History of Prices and of the State of the Circulation from 1793 to 1837. London: Longman, Orme, Brown, Green and Longmans.
Turner, John. 2014. Banking in Crisis: The Rise and Fall of British Banking Stability. Cambridge: Cambridge University Press.