Panic of 1847 facts for kids
The Panic of 1847 was a big money problem in Britain. It happened in 1847 and affected businesses and banks. This crisis might have started when the government announced it needed to borrow money. This money was for helping people during the Great Famine in Ireland. The panic was also linked to the end of a huge boom in building railways in the 1840s. Many companies that lent money, but weren't banks, also failed. The crisis happened in two parts: one in April 1847 and a more serious one in October 1847. The October part was even called 'The Week of Terror'.
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Why the Crisis Happened
To make the British economy more stable, the government led by Robert Peel passed a law called the Bank Charter Act of 1844. This law set a limit on how much money (Bank of England banknotes) could be printed at any time. It also made sure that the Bank of England had enough gold and silver to back up the money in circulation.
The law said that more money could only be printed if more gold or silver was added to the reserves. This meant that if gold left the country, or was taken out of the banks, there would be less money available. This made the Bank of England and British money sensitive to gold leaving the country.
In 1847, a lot of gold left Britain. Because of this, the government had to "pause" the Bank Charter Act. They sent a letter to the Bank of England, saying the Bank wouldn't be in trouble for breaking the law. After this, the money crisis ended almost right away, even though the law wasn't actually broken.
The Panic of 1847 caused many businesses and trading companies to fail. A writer for The Times newspaper, David Morier Evans, wrote about this at the time.
How the Crisis Developed
At the start of 1847, the Bank of England had about £15 million in gold reserves. This gold started to disappear. It dropped sharply after the government announced a loan for Ireland on March 1, 1847. By April 17, 1847, the gold reserves were only about £9 million. The Bank also had very few banknotes it could legally print.
On April 17, 1847, the government announced that the cost of helping with the famine would be paid by local taxes in Ireland. After this, the gold reserves and the number of banknotes the Bank could print started to go up. However, money kept leaving Britain. Some went for investments in America, and some was used to pay for food imports. These outflows stopped the recovery.
By October 1847, both the gold reserves and the banknote reserves reached new low points. The recovery only began when the government "paused" the Bank Charter Act of 1844 again. The Prime Minister and the Chancellor of the Exchequer sent a letter to the Governor of the Bank on October 25, 1847.
Different Ideas About the Crisis
Some experts who believe in the gold standard and Monetarist theories think the 1847 crisis wasn't as bad as it seemed. They connect it to the amount of money available. For example, Neville Ward-Perkins said the crisis was "artificial" and made to seem worse by people who had something to gain.
Another idea comes from the Austrian School of economics. Economist Jesús Huerta de Soto explains that after 1840, banks started lending a lot more money in Britain, France, and the United States. Many miles of railway tracks were built, and the stock market grew quickly, especially for railway companies. This led to a lot of risky investing until 1846.
He points out that in 1844, Britain passed the Bank Charter Act. This law said that new banknotes had to be fully backed by gold. However, this rule didn't apply to bank deposits and loans. The amount of these loans grew five times in just two years. This increase in loans helped spread the risky investing and made the crisis in 1846-1847 more severe.
Other explanations focus on the "Banking School" theory of financial crises. They link the crisis to how the Bank of England managed interest rates. This was especially true when people in the money markets were worried about the Irish loan.
What Happened After
David Morier Evans listed over 450 businesses that failed between August 1847 and December 1848.
Because the plans for a loan to help with the Irish famine didn't work out, Henry Grey, 3rd Earl Grey came up with a new idea for a currency system. This system was different from the Bank of England's central bank model. It became known as a currency board. Grey set up the first one with James Wilson and the government of Mauritius in Mauritius.
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