18 August 1825 – On this date, Scottish adventurer Gregor MacGregor issues a £300,000 loan with 2.5% interest through the London bank of Thomas Jenkins & Company for the fictitious Central American republic of Poyais. His actions lead to the Panic of 1825, the first modern stock market crash, starting in the Bank of England and precipitating the closure of six London banks and sixty country ones in England.
The Panic of 1825 was a stock market crash that started in the Bank of England arising in part out of speculative investments in Latin America, including the imaginary country of Poyais. The crisis was felt most acutely in England where it precipitated the closing of six London banks and sixty country banks in England, but was also manifest in the markets of Europe, Latin America, and the United States. An infusion of gold reserves from the Banque de France saved the Bank of England from complete collapse.
The panic has been referred to as the first modern economic crisis not attributable to an external event, such as a war, and thus the start of modern economic cycles. The period of the Napoleonic Wars had been exceptionally profitable for all sectors of the British financial system, and the expansionist monetary actions taken during transition from wartime to peacetime economy initiated a surge of prosperity and speculative ventures. The stock market boom became a bubble and banks caught up in the euphoria made risky loans.
Seventy banks failed. The current view puts much of the fault of the crash on the banks for not collecting quality information, performing inadequate surveillance, and not doing simple due diligence on ventures. The usual list of causes of the crisis are:
**Latin American debt issues
**Ease of issuance of banknotes from country banks led to unscrupulous partners investing in high risk, high return ventures
**Bank of England’s actions of rapidly increasing the money supply, then rapidly tightening it, initiating bank runs and finally refusing to act as lender of last resort until too late.
At the time, the Bank of England was not a central bank but a public, for-profit bank with three loyalties: its shareholders, the British government, and its correspondent commercial bankers. The Bank of England raised the lending rate to protect its investors, instead of lowering it to protect the public. The self-interest of the Bank of England thereby caused additional failures. Although banker Henry Thornton described in 1802 the proper lender of last resort actions to be taken by a central bank in such a crisis, it was not until 1866 with the Overend Gurney crisis of 1866 that the Bank of England would take actions to prevent widespread panic withdrawals.
Inaction by the Bank of England led to a systemic stoppage of the banking system, and was followed by widespread bankruptcies, recession and unemployment.
An historical novel by Stanley J. Weyman, Ovington’s Bank, is centered on the Panic of 1825.