Panic of 1847

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The Panic of 1847 was started as a collapse of British financial markets associated with the end of the 1840s railroad boom. The Bank of England had to request a suspension of the Bank Charter Act to end the crisis. It was caused by excessive monetary inflation due to the Bank of England and fractional reserve banking.

The panic of 1847 cleared away a vast number of unsound business houses, and trade generally became much more sound and healthy; this lasted until the year 1855.

The explanation by Spanish economist, Jesus Huerta de Soto, of Austrian School, is based in Austrian Business Cycle Theory:

"As of 1840 credit expansion resumed in the United Kingdom and spread throughout France and the United States. Thousands of miles of railroad track were built and the stock market entered upon a period of relentless growth which mostly favored railroad stock. Thus began a speculative movement which lasted until 1846, when economic crisis hit in Great Britain.

It is interesting to note that on July 19, 1844, under the auspices of Peel, England had adopted the Bank Charter Act, which represented the triumph of Ricardo’s Currency School and prohibited the issuance of bills not backed 100 percent by gold. Nevertheless this provision was not established in relation to deposits and loans, the volume of which increased five-fold in only two years, which explains the spread of speculation and the severity of the crisis which erupted in 1846."[1]

Impact on the Currency School

Following the passage of Peel's Act, the Bank of England, although abiding by the new restrictions on note issue, began a large-scale expansion of its deposit-banking activities, fueling a speculative bubble and resulting in the panic. Eventually, the 100-percent reserve provision of Peel's Act was suspended so as to prop up the central bank and its subsidiaries, thus negating the whole point of having the restriction to begin with.

The crisis of 1847 was a terrible blow to the Currency School's reputation. As Rothbard and Mises emphasized, however, it was not the central doctrines of the Currency School that were at fault but only the error regarding the distinction between notes and deposits. Nevertheless, the fact that the banking system failed so soon after the Currency reform made it appear as if the Currency principle itself were at fault and that restricting the central bank could only lead to economic disaster.[2]


  1. Jesús Huerta de Soto. "Money, Bank Credit, and Economic Cycles" (pdf), Second English edition 2009, p.484. Referenced 2011-01-13.
  2. Matt McCaffrey. Currency and Banking Reform in 19th-Century Britain, Mises Daily, September 08, 2010. Referenced 2011-01-13.