Victorian Financial Crises and Their Implications for the Future

By Kuttner, Kenneth N. | Business Economics, April 2010 | Go to article overview

Victorian Financial Crises and Their Implications for the Future


Kuttner, Kenneth N., Business Economics


Banking crises were a relatively common occurrence in 19th century England. Like the Federal Reserve today, the Bank of England struggled to quell panics by acting as the lender of last resort, while at the same time maintaining monetary stability. This article surveys the events leading up to and the Bank's response to the four post-1844 crises, highlights some of the similarities between the Victorian era panics and the 2007-08 crisis, and draws on the 19th century experience to illustrate the dilemmas facing modern central banks.

Keywords: financial crises, lender of last resort, central banking

**********

History does not repeat itself, but it does rhyme.--Mark Twain

Central bankers can be forgiven for believing in 2007 that systemic financial crises were a thing of the past. Crises did occur from time to time, of course: well-known episodes in the United States include the Latin American debt crisis, the Continental Illinois failure, the thrift crisis, and Long-Term Capital Management. These were damaging, to be sure, but none seriously threatened the financial system as a whole, nor did any create a widespread panic or scramble for liquidity. Only the Continental Illinois failure required the U.S. Federal Reserve to use its powers at the lender of last resort. (1)

Decades of relative stability gave rise to a narrow view of monetary policy in which the short-term interest rate was adjusted to achieve low inflation and dampen business cycles. Monetary policy was free to focus on macroeconomic objectives, unconstrained by any imperative to maintain or restore financial stability. Heavy regulation contributed to this perception: deposit insurance would prevent panics and runs, while prudential regulation and the separation between commercial and investment banking would prevent excessive risk taking.

The 2007-08 financial crisis demolished the belief in an inherently stable financial system. The underlying causes of the crises will surely be debated for years to come, but it has become abundantly clear that a clean separation between conventional monetary and financial stability policies no longer exists. The current conventional wisdom is that low interest rates earlier in the decade contributed to the crisis. The validity of this view is debatable, but what is beyond dispute is that the Federal Reserve and other central banks have been compelled to lend vast sums in their efforts to shore up a financial system on the verge of collapse. The Federal Reserve's balance sheet has undergone a transformation from an $800 billion portfolio of Treasury securities to a $2 trillion collection of mortgage-backed securities, agency issues, commercial paper, loans, and even ownership stakes in private companies. These asset purchases have potentially large monetary implications, such as near-zero short-term rates and a $1.1 trillion surge in the monetary base.

It would appear that we have entered a messy new world in which central banks are forced periodically to intervene aggressively to ensure the functioning of financial markets, and perhaps even engage in the occasional bailout. But what we have seen could instead be a return to an older world of chronic financial instability. As described vividly in Kindleberger [1989], until relatively recently periodic financial crises were the rule, not the exception. In this unstable environment, central banks were quite often forced to take an active role in stemming those crises.

The financial turmoil of the 1930s is familiar and has been thoroughly studied by Friedman and Schwartz [1963] and Bernanke [1983], among many others. The panic of 1907 is another oft-cited and well-researched crisis. But while these episodes are interesting in their own right, they are of limited value in understanding central banks' responses during the present crisis. The Federal Reserve's passive response to the collapse in the 1930s failed to avert a systemic crisis. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Victorian Financial Crises and Their Implications for the Future
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.