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The Gold Standard and the Bank of England in the Crisis of 1847

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  • Rudiger Dornbusch
  • Jacob A. Frenkel

Abstract

This paper examines the operation of the gold standard and the performance of the Bank of England during the crisis of 1847. The key feature of that crisis has been its origin: it originated from a massive real shock rather than from monetary disorder. A harvest failure gave rise to commercial distress and financial panic.Following a brief outline of the main events during the 1847 crisis, we present asimple model of the financial sector that captures the central characteristics of the crisis. The model, which highlights the role of confidence in both external and internal convertibility, is then used for interpreting the detailed characteristics of the financial crisis.Faced with a confidence crisis leading to international and external monetary drains,the Bank of England suspended Peel's act and thereby was allowed to issue fiat money without being constrained to have full gold backing. Our analysis shows that suspension of Peel's act was the proper policy required for the restoration of confidence. It also sheds light on the role of a lender of last resort in cases of banking panic.As for the evaluation of the gold standard, the 1847 crisis demonstrates that International capital flows have played a key role in the adjustnent mechanism. Further, it demonstrates that in contrast with the traditional representation, the gold standard has not been characterized by automatic, non-discretionary adjustment. On the contrary,banking policies and changes in the reserve-deposits and currency-deposits ratios have affected the money stock independently of gold flows.

Suggested Citation

  • Rudiger Dornbusch & Jacob A. Frenkel, 1982. "The Gold Standard and the Bank of England in the Crisis of 1847," NBER Working Papers 1039, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1039
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    References listed on IDEAS

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    1. Hicks, John, 1977. "Economic Perspectives: Further Essays on Money and Growth," OUP Catalogue, Oxford University Press, number 9780198284079.
    2. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867–1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, September.
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    1. Patrick K O'Brien & Nuno Palma, 2020. "Danger to the Old Lady of Threadneedle Street? The Bank Restriction Act and the regime shift to paper money, 1797–1821," European Review of Economic History, European Historical Economics Society, vol. 24(2), pages 390-426.
    2. Alberto Giovannini, 1992. "Bretton Woods and Its Precursors: Rules Versus Discretion in the History of International Monetary Regimes," NBER Working Papers 4001, National Bureau of Economic Research, Inc.
    3. Bindseil, Ulrich & Winkler, Adalbert, 2012. "Dual liquidity crises under alternative monetary frameworks: a financial accounts perspective," Working Paper Series 1478, European Central Bank.
    4. Patrick K. O’Brien & Nuno Palma, 2019. "Danger To The Old Lady Of Threadneedle Street? The Bank Restriction Act And The Regime Shift To Paper Money, 1797-18211," Working Papers 0082, Utrecht University, Centre for Global Economic History.
    5. M. June Flanders, 1993. "A Model of Discretion: The Gold Standard in Fact and in Fiction," The World Economy, Wiley Blackwell, vol. 16(2), pages 213-235, March.
    6. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
    7. Bordo, Michael D., 1986. "Explorations in monetary history: A survey of the literature," Explorations in Economic History, Elsevier, vol. 23(4), pages 339-415, October.
    8. Stefano Ugolini, 2012. "The origins of foreign exchange policy: the National Bank of Belgium and the quest for monetary independence in the 1850s," European Review of Economic History, European Historical Economics Society, vol. 16(1), pages 51-73, February.
    9. Jérôme Sgard, 1998. "Inflation, stabilisation et prix relatifs en Argentine et au Brésil," Sciences Po Economics Publications (main) hal-03585833, HAL.
    10. Michael D. Bordo, 1998. "The financial crisis of 1825 and the restructuring of the British financial system - commentary," Review, Federal Reserve Bank of St. Louis, issue May, pages 77-82.
    11. Alberto Giovannini, 1993. "Bretton Woods and Its Precursors: Rules versus Discretion in the History of International Monetary Regimes," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 109-154, National Bureau of Economic Research, Inc.
    12. Jérôme Sgard, 1998. "Inflation, stabilisation et prix relatifs en Argentine et au Brésil," Post-Print hal-03585833, HAL.
    13. Markus K. Brunnermeier & Isabel Schnabel, 2014. "Bubbles and Central Banks: Historical Perspectives," Working Papers 1411, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 31 Oct 2014.
    14. Kilian Rieder & Michael Anson & David Bholat & Miao Kang & Ryland Thomas, 2018. "Frosted glass or raised eyebrow? Testing the Bank of England’s discount window policies during the crisis of 1847," Working Papers 18020, Economic History Society.
    15. Miller, Victoria, 1996. "Speculative currency attacks with endogenously induced commercial bank crises," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 383-403, June.
    16. repec:spo:wpmain:info:hdl:2441/6982 is not listed on IDEAS
    17. Willem H. Buiter & Jonathan Eaton, 1982. "On the Adequacy or Inadequacy of Keynesian Balance-of-Payments Theory: A Rejoinder," NBER Working Papers 1032, National Bureau of Economic Research, Inc.
    18. Harold James, 2023. "Inflation and globalisation: The Tawney Lecture 2022," Economic History Review, Economic History Society, vol. 76(2), pages 391-412, May.
    19. Mike Anson & David Bholat & Miao Kang & Kilian Rieder & Ryland Thomas, 2019. "The Bank of England and central bank credit rationing during the crisis of 1847: frosted glass or raised eyebrows?," Bank of England working papers 794, Bank of England.
    20. M. Berlemann & Nikolay Nenovsky, 2003. "Lending of First Versus Lending of Last Resort: The Bulgarian Financial Crisis of 1996/1997," Post-Print halshs-00260241, HAL.
    21. Jérôme Sgard, 1998. "Inflation, stabilisation et prix relatifs en Argentine et au Brésil : l'expérience des années quatre-vingt-dix," Revue Économique, Programme National Persée, vol. 49(1), pages 239-256.
    22. della Paolera, Gerardo & Taylor, Alan M., 2002. "Internal versus external convertibility and emerging-market crises: lessons from Argentine history," Explorations in Economic History, Elsevier, vol. 39(4), pages 357-389, October.
    23. Michael Perelman, 1990. "The Phenomenology of Constant Capital and Fictitious Capital," Review of Radical Political Economics, Union for Radical Political Economics, vol. 22(2-3), pages 66-91, June.
    24. Cormac Ó Gráda & Eric Vanhaute & Richard Paping, 2006. "The European subsistence crisis of 1845-1850 : a comparative perspective," Working Papers 200609, School of Economics, University College Dublin.
    25. Nuno Palma, 2016. "Reconstruction of annual money supply over the long run: The case of England, 1279-1870," Working Papers 0094, European Historical Economics Society (EHES).

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