Panic of 1866

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The expansionary stage of the Panic of 1866 began in 1861. The evolution of banking in England, and credit expansion initiated by the Credit Foncier in France played a key role. Expansion drove up the price of intermediate goods, construction and cotton-related industries and persisted at a rapid pace until panic broke out in 1866, due to a series of spectacular failures, the most famous of which was that of Overend Gurney in London.[1] The growth of banking in England without sufficient attention to liquidity, and the use of bank credit to support a speculative craze in which within a few years nearly three hundred companies, with a total nominal capital of £504,000,000, had been organized, prepared the way for the crash.[2]

At this time, as occurred in 1847 and 1857, Peel’s Bank Charter Act was temporarily suspended with the purpose of injecting liquidity into the economy and defending the Bank of England’s gold reserves. France’s first investment bank, the Crédit Mobiliaire, failed. The above gave rise to a depression which, as always, affected principally the sector of railroad construction, and unemployment spread mostly to capital-goods industries. Between 1859 and 1864, Spain engaged in substantial credit expansion which fostered widespread malinvestment, particularly in railroads. Beginning in 1864 it suffered a recession which reached its peak in 1866.[1]

Crisis in Italy

Before Corso Forzoso ("forced circulation"), Italy was on a gold and silver bimetallic standard, and holders of Italian bank notes could redeem them in gold and silver specie.

The origin of Corso Forzoso can be traced to costly wars waged to unify Italy, disorderly public finances arising from consolidation of budgets and taxation systems of separate Italian governments, and heavy public works in the name of industrialization. Between January 1, 1862, and January 1, 1867, the public debt grew from 3.131 billion lire to 6.929 billion lire. The debt was financed by short-term treasury bonds, a third of which were held by foreign investors sensitive to crises of confidence and expecting bond redemption in gold and silver. The end of the U.S. Civil War, bringing cancellation of war contracts, demobilization, and renewed competition from cheap U.S. cotton, sent the economic tremors that pushed Italy over the monetary precipice. The price of Italian bonds on the Paris Bourse tumbled from 80 percent to 36.44 percent of par value, and Italian bondholders and the correspondents of foreign bondholders asked for redemption in gold, causing a shortage of gold and a crisis of confidence in the banking system. A run on the bank ensued and on May 1, 1866, the government decreed the inconvertibility of bank notes - the Corso Forzoso.

The National Bank of Italy avoided the runaway issuance of bank notes that brought to ruin many past experiments with paper money. After achieving a balanced budget early in the 1870s, the Italian government began taking steps to restore convertibility of the lira. As the government paid off its debts to the National Bank of Italy in gold, the bank was able to restore convertibility, and on April 7, 1881, the Corso Forzoso came to an end.[3]

Italy was part of the Latin Monetary Union, which required small silver (token) money to be accepted freely by all the signatories. A profit arose in exporting Italian silver to the other three countries (France, Switzerland and Belgium). The money interest was not slow to seize its opportunity, and the commerce assumed enormous proportions. Soon most of the Italian small coin was in circulation in the territory of the allies, where it produced a plethora of silver circulation, at the same time further weakening the Italian financial position.[4]


  1. 1.0 1.1 Jesús Huerta de Soto. "Money, Bank Credit, and Economic Cycles", Second English edition 2009, p.485. Referenced 2011-01-15.
  2. Elgin Groseclose. "Money and Man", Fourth Edition 1976, p.195. ISBN 0-8061-1338-3. Referenced 2011-01-15.
  3. Larry Allen. "The Encyclopedia of Money", Google Books Preview, p.89. 2009. Referenced 2011-01-15.
  4. Elgin Groseclose. "Money and Man", Fourth Edition 1976, p.160-161. ISBN 0-8061-1338-3. Referenced 2011-01-15.