Lessons From The Panic Of 1825?

By Big Tent Democrat, Section Economy
Posted on Wed Apr 15, 2009 at 09:43:04 AM EST
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Brad DeLong argues for learning from the Bank Of England's actions in 1825:

Monday morning, in the pre-dawn dark, Henry Thornton was at the Bank of England with Governor Buller and Deputy Governor Richards. For security reasons, they were alone. Buller and Richards counted out £400,000 in bank notes. "I hope this won't overset you, my young man," Marianne Thornton claims one of the two said to Henry, “to see the Governor and Deputy Governor of the Bank [of England] acting as your two clerks." Henry Thornton arrived at his own bank before opening with £400,000 in cash. The run on bank funds then recommenced. But "rumours that the Bank of England had taken them under its wing soon spread, and people brought back money [on Monday] as fast as they had taken it out on Saturday." This was the birth of central banking as we know it.

[MORE . ..

The Bank of England had accepted the role of maintaining orderly markets and financial stability in a crisis. Why? Because the prices of financial assets are too important to be left to the market when it is panicked and when letting prices reach market levels will mean unemployment for hundreds of thousands in 1825, or tens of millions today.

Ben Bernanke's Public Private Investment Partnerships—the vehicles for purchasing banks’ toxic assets—are a natural development, even a Burkean development, of policy that has been pursued for 184 years now.

(Emphasis supplied.) Sounds to me like the Bank of England needed a regulatory receivership mechanism and deposit insurance. Sure would be great if the United States had things like that. Oh by the way, how did Henry Thornton's bank turn out?

And the bank of Pole, Thornton? Alas, Henry Thornton was irrationally exuberant when he swore that the bank was solvent. The bank was eventually closed. The partners lost their capital shares. The Bank of England had to wait years before getting its emergency loan back. (They did not care much; they were too big to fail, and Lord Liverpool thought they had done well.)

Hell of a story though . . .

The problem with DeLong's little morality tale, which is intended to make us feel better about the Geithner Plan, is that the Geithner Plan is not likely to work without giving away a few trillion more to the banks.

And to compare the role of national government today with the English government in 1825 is ludicrous. Of course the Bank of England did well given the tools available to it. In essence, Bernanke did the same thing last fall when he opened the discount window at virtually zero interest rates to the banks.

Today, in theory at least, we have an entire regulatory set up to deal with insolvent banks. What happened to it?

Pretty weak stuff from DeLong.

Speaking for me only

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Lessons From The Panic Of 1825? | 6 comments (6 topical)

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Most interesting for what is left out (5.00 / 2) (#3)
by lambert on Wed Apr 15, 2009 at 11:48:38 AM EST

The complete lack of transparency and accountability then as now is the common thread, of course, under the period color and Forster's amusing style. Two responses:

First, last I checked, 1825 was 7 years before the Reform Act of 1832, where the franchise was extended to 1 in 7 adult British males.

Second, I supposeone reading of Forster's story is that the "scheming stock company bubbles" of 1825 equate to our 21st century toxic derivatives supported by accounting control fraud. (Although, if fraud based on unpayable gambling debts had been at the heart of the panic of 1825, I somehow think the Victorians would have mentioned that.) However, as DeLong points out, today's media could be qualitatively different. If there was fraud then, the mechanics were surely visible to only to insiders; today, they're visible to anybody who watch Bill Moyers or read a transcript.

So, if the moral that DeLong draws from the story is -- and it's certainly a plausible reading -- that only a financial autocracy can save us, as opposed to our putative democracy, I'm not sure I buy into it. Why would I?

And if the second moral of the story is, relax, it's all happened before, so lay back and enjoy it, I'm not sure I buy into that either. Again, why would I?

Finally, again, because of the complete lack of transparency and accountability in the current bailouts, there's simply no way to know whether DeLong's analogy has anything to do with what's really going on or not. It's just a story. Another piece of the narrative.

Unintended consequences (5.00 / 1) (#4)
by Slado on Wed Apr 15, 2009 at 12:57:40 PM EST

is what you get when the state or a government agency tries to control something so complicated as the economy.

Considering the economy is made up of trillions of dollars with trillions of possible inputs the idea that a gov't agency can control it correctly is ludicrous. Everyone is an expert with 20/20 hindsight. Nobody can predict what will happen in the future when they decide to monkey with the way an economy is functioning through government intervention.

Over the last 20 or 30 years the FED along with the government screwed with the money supply, intrest rates and credit rules allowing and easy access to money for banks, consumers, wall street and buisnesses resulting in an unintended bubble which then resulted in an unintended bursting of that bubble.

It was the removal of capitalist forces (mainly risk) that created this crisis not the removal of regulation by government. What some poeple won't admit is no government agency can properly regulate something so complicated as the economy. Lack of regulation in one are will result in too much in another and these unintended consequences turn into bubbles, recessions and the like.

Just like the depression was caused by government intervention this crisis was caused by government intervention.

There is a delicate balance between how much gov't intervention in the economy is necessary and how much results in these unintended consequences. I would argue that we are way too far on the side of government intervention and much less of it would do us all a lot of good.

Regulation is necessary (none / 0) (#5)
by reslez on Wed Apr 15, 2009 at 03:03:33 PM EST

to prevent and punish fraud. Regulation also provides transparency which is necessary for markets to function properly. Don't cry to me about government intervention. We had 8 years of do-as-thou-wilt. What we lacked was enforcement.

Yes, the government intervenes. The Fed and Treasury intervene on behalf of big business. The market is in bed with the regulators. That's the cause of the distortion. And every regulatory failure leads to a greater concentration of power in the hands of the people who failed in the first place.

How much of a subprime mess would we be in if banks had insisted on full documentation of income history and raised an eyebrow at Croesus-like home appraisals? They turned a blind eye to fraud, they lobbied/bribed politicians to let them do it, and now they need a bailout. Go figure.


: If you focus on regulation you miss the point (none / 0) (#6)
by Slado on Wed Apr 15, 2009 at 05:08:50 PM EST

My point is the government doesn't have the intellectual capacity to regulate something as complex as the economy properly.
You basically agree with me. You just think more regulation would work. It won't.
You then go on to say special interest etc... exactly.
Capitalism doesn't have special interest unless you count profit amoung them. If the market less regulated and the gov't didn't ensure banks, print the money, and stop monkeying with interest rates to benefit special interests then we wouldn't need all the regulation in the first place.
More simply put the gov'ts role in the economy is to be the referee. Somewhere along the way they started playing Quaterback and making them the coach isn't going to improve anything.

Or , as an American said then (none / 0) (#1)
by Cream City on Wed Apr 15, 2009 at 10:26:39 AM EST

in a quote from a great New Yorker article on the early history of debt in this country, the impact of that era's banking mess, and a quote that befits your masters of the universe:

[They] are an active restless people impatient of slow profits. Their habits . . . must undergo, not a reformation, but a complete revolution. A new race must arise on the broken fortunes of the present . . . to plod and earn an honest living, to accumulate by slow degrees.

heh. (none / 0) (#2)
by Mike Pridmore on Wed Apr 15, 2009 at 10:34:10 AM EST

I have had a lot of respect for Brad. And there is an element of truth if what one is concerned about is public confidence. The missing part of Brad's morality tale is that there is a lot of publicly aired concern that the Geithner Plan isn't addressing the underlying problems of our financial system. And Brad has done precious little to address those concerns.

Unfortunately, the underlying problems are complicated enough that it is easy to deceive most of the public with some fancy monetary prestidigitation, which is exactly what I consider the Geithner Plan to be. But if I had not read Krugman and the growing chorus of those who can explain how the slight of hand is being performed, I probably would not feel as strongly about it as I do.