Calming the Storms: The Carry Trade,

the Banking School and British

Financial Crises Since 1825 Charles
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PALGRAVE STUDIES IN ECONOMIC HISTORY

Calming the Storms

The Carry Trade, the Banking
School and British Financial
Crises Since 1825
Charles Read
 Palgrave Studies in Economic History

Series Editor
Kent Deng, London School of Economics, London, UK
Palgrave Studies in Economic History is designed to illuminate and enrich
our understanding of economies and economic phenomena of the past.
The series covers a vast range of topics including financial history, labour
history, development economics, commercialisation, urbanisation, indus-
trialisation, modernisation, globalisation, and changes in world economic
orders.
 Charles Read

Calming the Storms

The Carry Trade, the Banking School and British
Financial Crises Since 1825
Charles Read
University of Cambridge
Cambridge, UK

ISSN 2662-6497 ISSN 2662-6500 (electronic)

Palgrave Studies in Economic History
ISBN 978-3-031-11913-2 ISBN 978-3-031-11914-9 (eBook)
https://doi.org/10.1007/978-3-031-11914-9

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Frontispiece: The Overstone Cycle of Trade from The Money Bag, 1858 vol.,
between p. 112 and p. 113, fold out. The cartoon gives the Banking School’s
point of view and is actually a criticism of the Currency School (Princeton
University Library)
 Acknowledgements

The research presented in this book would not have been possible without
the help of a large number of individuals and institutions, to whom I am
extremely grateful. First of all, I would like to thank the British Academy
for the award of a post-doctoral fellowship (PF2\180089), which funded
the research in this book as part of a larger project entitled ‘The causes
and consequences of financial crises in the United Kingdom of Great
Britain and Ireland, c.1801–1922’. Their support of my academic career
through its post-Ph.D. stage has been invaluable.
My introduction to the crises of 1847 occurred during my doctoral
research completed at the University of Cambridge for a thesis entitled
‘British Economic Policy and Ireland, c.1841–1853’ (2016). I would
like to thank the Arts and Humanities Research Council of the United
Kingdom for funding my doctoral work and to Eugenio Biagini and
Martin Daunton for supervising it. The thesis reassessed the short-term
causes and consequences of the financial crises in the City of London in
1847 and the impact they had on Ireland during its Great Famine, which
was little understood in the academic literature up to that point. It was
as I was finishing off my Ph.D. project that I realised the insights I drew
about the crises of 1847 could also be applied more widely over the past
200 years of British financial history, sparking the genesis of this project.
I would like to acknowledge those institutions that have hosted my
post-doctoral research and that allowed me to develop my ideas about
the causes of financial crises in the United Kingdom. In particular, I

vii
viii ACKNOWLEDGEMENTS

would like to thank Roy Foster and the Principal and Fellows of Hertford
College, Oxford, for electing me to the Irish Government Senior Schol-
arship there; the Master and Fellows of Fitzwilliam College, Cambridge,
for electing me for a year as a bye-fellow; and the Master and Fellows of
Corpus Christi College, Cambridge, for electing me to a fellowship and
college lectureship in history. I wrote and redrafted substantial sections of
this book living in Corpus during the lockdowns resulting from the covid-
19 pandemic and I would like to thank those colleagues who kept my
spirits up during that period, in person or online, particularly: Christopher
Andrew, Marina Frasca-Spada, Andrew Harvey, John Hatcher, Philippa
Hoskin, Shruti Kapila, Christopher Kelly, Peter Martland, Amar Sohal,
Emma Spary, Michael Sutherland and Samuel Zeitlin. I would also like
to thank my early-career comrades-in-arms for their moral support during
the research and writing phases of this book, including but not limited to:
Robin Adams, Eriko Padron-Regalado, Brian Varian and Lewis Willcocks.
I would like to thank all those who have helped with the research,
writing and publication of this book, too numerous in number to mention
all by name. Nevertheless, I would especially like to thank Kent Deng
and my editors at Palgrave for including this volume in the Palgrave
Studies in Economic History series. I would also like to thank those who
attended papers I gave based on earlier versions of this research for their
generous and useful feedback at the ‘State, economy and society’ confer-
ence at Churchill College, Cambridge in 2016, the Oxford Irish History
Seminar at Hertford College, a workshop on the Bubble Act hosted
by D’Maris Coffman and Helen Paul, and several Economic History
Society annual conferences. My immense appreciation goes to Eugenio
and Martin for reading many draft sections of this project over the past
few years and to Rui Esteves, Aaron Graham, Sara Horrell, Harold James,
Doug Kanter, Eoin McLaughlin, Duncan Needham, Kevin O’Rourke,
Robin Pearson, George Peden, William Quinn, Sabine Schneider, Peter
Solar and Solomos Solomou for useful support, feedback and research
leads at critical moments in this project’s gestation. All remaining errors
nonetheless remain my own.
 ACKNOWLEDGEMENTS ix

Finally, but most of all, I would like to thank my parents, Simon and
Karin Read, for all their love and support, and without whom this project
would never have seen the light of day. This book is dedicated to them.
Corpus Christi College, Cambridge

May 2022 Charles Read

 Contents

1 Introduction 1
1.1 The Carry Trade and the Banking School 3
1.2 A British Bank Is Run with Precision? 5
1.3 Current Research in Economic History 9
1.4 The Monetary Thought of the Non-conformist
Conscience 11
1.5 Re-introducing the Banking School 13
2 Peel’s Economic-Policy Regime Change in Britain
During the Early Nineteenth Century 21
2.1 Peel’s Policies 23
2.2 Opening up Trade 25
2.3 Currency 35
2.4 Interest Rates 42
2.5 Conclusion 46
3 The Ideas and Policies of the Banking School 55
3.1 The Banking School as a Reaction Against Peel’s
Policies 56
3.2 The Banking School and Interest Rates 61
3.3 Testing the Banking School’s Theories with Charts 66
3.4 Testing the Banking School’s Theories
with Econometrics 77
3.5 Summary of Conclusions 85

xi
xii CONTENTS

4 The Crises of 1825 and 1837–1839 91

4.1 1825: An Overview of the First Crisis of the Gold
Standard Era 92
4.2 The Run-Up to the 1825 Crisis 98
4.3 The Bullion Drain of 1810 102
4.4 The Drain of 1816–1818 104
4.5 The Drain of 1825 105
4.6 The Wider Consequences of the 1825 Crisis 112
4.7 The Crises of 1837–1839 117
4.8 The Effect of the Slavery Abolition Act of 1833 120
4.9 The Two Schools and the 1830s Crises 121
4.10 Consequences of the 1830s Crises 129
5 The 1847 Crises 137
5.1 An Overview of the Crises 138
5.2 The First Phase of the Crisis 142
5.3 The Second Phase of the Crisis 153
5.4 The Consequences of the Crisis 159
6 The 1857–1858 Crisis 167
6.1 The Currency School’s and Banking School’s Ideas
in the 1850s 168
6.2 An Overview of the 1857–1858 Crisis 171
6.3 Bullion Flows to France and the Continent 178
6.4 Capital Flows and the United States 181
6.5 Capital Flows to Egypt, India and China 184
6.6 The Worst Period of the Crisis 188
6.7 The Consequences of the Crisis 192
7 The Uncertainties of the 1860s and the Crisis of 1866 199
7.1 The Banking School and the Crisis of 1866 203
7.2 The Background to the Crisis of 1866 208
7.3 The American Civil War and the Cotton Industry 213
7.4 Europe and the Crisis of 1864 217
7.5 The Indian Connection to the Crisis of 1866 220
7.6 Limited Companies or Interest Rates? 229
7.7 Consequences of the Crisis 235
8 The Fading Away of Crises After 1866 247
8.1 An Overview of the Period 249
8.2 The Build-Up to Problems in 1873 255
 CONTENTS xiii

8.3 The Peak of the 1873 Mini-Crisis 257

8.4 Mini-Crises in the Remainder of the Nineteenth
Century 260
8.4.1 1878 260
8.4.2 1882 262
8.4.3 1884–1885 263
8.4.4 1888 267
8.4.5 1890 268
8.4.6 The Late 1890s 270
9 The Twentieth and Twenty-First Centuries: From
the Banking School to the Carry Trade 275
9.1 Lessons from the Banking School’s Ideas 277
9.2 The Carry Trade and Economic Theory 280
9.3 Carry Trades, Interest Rates, Capital Flows
and Crises 285
9.4 The Interwar and Post-War Years 287
9.5 The Secondary Banking Crisis of 1973–1975 291
9.6 The Crisis of 2007–2009 295
9.7 The Covid-19 Pandemic and Beyond 299
9.8 Policy Prescriptions 301
10 Conclusion: Calming the Storms 313
10.1 Going Back and Forth for Two Centuries 315
10.2 The Disappearance and Reappearance of British
Banking Crises 318
10.3 The Carry Trade in British History 322

Appendix: Details of Econometric Analysis in Chapter 2 327

Bibliography 333
Index 353
 Abbreviations

B.L. London: British Library

CUP Cambridge University Press
N.A. Kew: National Archives
OUP Oxford University Press
PP Parliamentary Paper
UL University Library
UP University Press

xv
 List of Figures

Fig. 2.1 Duty payable per quarter for foreign imports of wheat
according to price in shillings/quarter 1828–1869 33
Fig. 2.2 Cost of interest on national debt and government
expenditure 1797–1830 (£m) 43
Fig. 3.1 The Overstone Cycle of trade from The Money Bag, 1858
vol., between p. 112 and p. 113, fold out (Princeton
University Library) 64
Fig. 3.2 UK long-term interest rate (consol yield) and years
with real GDP per person lower than the previous year 68
Fig. 3.3 Long-term interest rates for the United Kingdom
and United States, 1810–1899 69
Fig. 3.4 A comparison of US and UK short-term free market
interest rates 1836–1899. At the top, shown as a dotted
line, is the ratio ([US rate] – [UK rate])/US + UK rates.
Where this ratio falls between 0.1 and −0.1, the period
is shown by the grey shaded bars 70
Fig. 3.5 A comparison of US and UK short-term free market
interest rates 1825–1899 and long-term UK interest rates 72
Fig. 3.6 The note and coin reserve to total deposits ratio, weekly
data 73
Fig. 3.7 The bullion reserve to total liabilities ratio, weekly data 74
Fig. 3.8 The Bank of England Note Reserve and Total Coin
and Bullion, weekly data 75
Fig. 3.9 Percentage decrease in nominal English GDP per head
over next 4 years by year (%) 76

xvii
xviii LIST OF FIGURES

Fig. 3.10 Percentage decrease in real English GDP per head

over next 4 years by year (%) 77
Fig. 4.1 UK short-term interest rate and long-term rate (monthly)
and Philadelphia discount rate (annual) 97
Fig. 4.2 Exchange rate of the UK £ with the French franc (lh
scale) and US $(rh scale) 1802–1830 99
Fig. 4.3 Bullion reserves, including coin, in the Bank of England,
UK Bank rate and the price of gold 1802–1830 99
Fig. 4.4 Bullion and coin in the Bank of England compared
with balance of trade with and without services
and interest 1802–1830. Trade depressions are marked 1,
2 and 3, bullion drains A, B and C 100
Fig. 4.5 Balance of trade of bullion, approximate estimate, Bank
rate, annual average 101
Fig. 4.6 Commissions of bankruptcy against bankers in England
(by bank as opposed to individuals). A common error is
mixing earlier individual and later bank bankruptcy data 103
Fig. 4.7 Yield estimated from prices for Bank of England shares,
East India Company shares and consols 1809–1824. The
rates are drawn together over the period 1819–1823 109
Fig. 4.8 Yield of 5% French rentes and 3% United Kingdom
consols and the Bank of England rate 1819–1834 111
Fig. 4.9 Bank of England bullion reserve, weekly 1833–1840,
slave compensation activity index based on payments
and decisions per month with 25-week moving average 122
Fig. 4.10 Bank of England Bank rate, yields of French rentes
and US and UK free market interest rates 1830–1841 123
Fig. 4.11 $/£ exchange rate 1825–1845 and linear trendline 125
Fig. 4.12 Bullion and coin in the Bank of England compared
with the balance of trade with and without services
and interest 1830–1843 126
Fig. 4.13 UK Balance of trade of bullion, approximate estimate
1830–1843 126
Fig. 4.14 US balance of trade of specie and UK in $, 1830–1843 129
Fig. 4.15 Number of cotton factory operatives and wages by type
(hand or machine) 1830–1844 131
Fig. 4.16 Percentage unemployment in Friendly Society
of iron-foundry workers 1830–1844 131
Fig. 5.1 French, UK and US market interest rates and UK Bank
of England official rate Jan. 1844–Jan. 1851 141
 LIST OF FIGURES xix

Fig. 5.2 Bullion and coin in the Bank of England compared

with balance of trade with and without services
and interest 1838–1850 143
Fig. 5.3 Balance of trade of bullion, approximate estimate
1838–1850 144
Fig. 5.4 Bank of England note reserve, bullion reserve, total
deposits (all £m) and note reserve to total deposits
ratio, weekly, 3/10/1846 to 13/11/1847. Vertical lines
represent 1/3/1847 and 17/4/1847, the announcement
of the loan and reported third reading of the Poor Relief
(Ireland) Bill 1847 146
Fig. 6.1 Short-term interest rates in the UK, US, Holland,
and France, January 1852–July 1859 172
Fig. 6.2 Balance of weekly exports and imports of bullion
and coin and Bank of England bullion reserve, 1851–1858 173
Fig. 6.3 The coincidence of price-index rises and high Bank rates
plus bullion drains (years with instability) in the UK
in the 1850s 176
Fig. 6.4 Bullion and coin in the Bank of England compared
with balance of trade with and without services
and interest 1852–1862 176
Fig. 6.5 Imports of bullion from America to the United Kingdom,
1851–1857 182
Fig. 6.6 Average annual yield for Indian Railway Securities
and the Indian loan 1858, 1855–1859, compared
with the yield from UK consols 186
Fig. 6.7 Unemployment among member of Friendly Society
of Ironworkers from July 1854 to December 1861 193
Fig. 6.8 Average wages/week compared with cost-of-living index 193
Fig. 7.1 Short-term interest rates in the UK, US and France
1858–1889 202
Fig. 7.2 UK Bank rate and CPI price index (2015 = 100) against
the occurrence of crises and disturbances after the 1860s 202
Fig. 7.3 Total bullion flows in and out of the UK compared
with crises, as identified by UK and US interest rates
moving together 203
Fig. 7.4 US–UK Short-Term Rate, Bullion Flow from US to UK
(£m per week) for 1866, Bank of England Note Reserve
(£m) 205
Fig. 7.5 $/£ exchange rate 1860–1882, showing the ‘greenback
period’ 214
xx LIST OF FIGURES

Fig. 7.6 Short-term interest rate in the UK, US and France

1859–1867 218
Fig. 7.7 Prices (rh scale) and quantities (lh scale) of raw cotton
imported via Liverpool (d/lb) 221
Fig. 7.8 Bank of Bombay Discount Rate for Private Bills (%)
and Total Deposits (Lakh Rupees) (1 Lakh = 100,000
Rupees ≈ £10,000 in 1864) monthly figures 227
Fig. 7.9 Bank of Bombay Discount Rate for Govt. Bills—Bank
of England Minimum Discount Rate (Bank rate) and Net
Bullion Flows from the United Kingdom to India
(£million/month). Exports to India may include onward
transfers to China 227
Fig. 7.10 Income of Bank of England from discounting and short
loans August 1847 to August 1869 232
Fig. 7.11 Total bullion flows in and out, bullion reserves and Bank
rate of the UK weekly, June 1864–March 1866 236
Fig. 8.1 Short-term interest rates 1870–1899 253
Fig. 8.2 UK Bank rate weekly, US short-term commercial-paper
rate monthly, net gold exports UK > US, 1/1/1873
to 24/12/1873 255
Fig. 8.3 UK Bank rate weekly, US short-term commercial-paper
rate monthly, net gold exports UK > US, 2/1/1878
to 31/12/1879 261
Fig. 8.4 Short-term interest rates and gold movements
between the United Kingdom and the United States
1884–1885 265
Fig. 9.1 Interest rates (short term) US (New York) and UK (Bank
of England) 1950 to 2019 294
Fig. 9.2 Quarterly short-term US and UK interest rates
and capital flows into the United Kingdom (£bn)
2001-Q1 to 2016-Q4 297
 List of Tables

Table 2.1 Loss of value of Bank of England notes against gold coin 38
Table 3.1 Results of OLS test with Bullion Reserve as dependent
variable 78
Table 3.2 Results of OLS test with Bank Rate as dependent
variable 79
Table 3.3 Results of Granger Causality test: Bank Rate and Bullion
Reserve 79
Table 3.4 Results of Granger Causality test: Bank Rate and free
market rate 80
Table 3.5 Crises months denoted by ‘1’ in the Probit model 81
Table 3.6 Results of OLS test with first difference of ‘Bullion
Exports from UK to the US minus Imports from US’
as the dependent variable 83
Table 3.7 Results of OLS test with ‘Bullion Exports from UK
to the US minus imports from US’ as the dependent
variable 83
Table 3.8 Results of Granger Causality test between interest-rate
difference and bullion flows and interest-rate difference
and exchange rate (all first differenced) 83
Table 3.9 Results of an OLS test with log ‘Total capital flows
in and out of UK’ as the dependent variable 84
Table 3.10 Results of an augmented Engle-Granger test with log
‘Total capital flows in and out of UK’ as the dependent
variable (m = million) 85

xxi
xxii LIST OF TABLES

Table 4.1 Loans raised for foreign states that defaulted,

1821–1825 114
Table 6.1 Percentage of bullion exported from UK, imported
by France 1851–1857 179
Table 6.2 Annual Average of bullion (£m) in Banks of England
and France 1852–1860 180
Table 6.3 Capital movements into US (imports + ve) $m 182
Table 6.4 Example falls in US bank shares in the period
October–November 1855 185
Table 7.1 Bullion transfers to and from the UK, US and India 216
Table 7.2 International loans offered in London 1862–1863 217
Table 7.3 Total value of discounts and advances for short periods
from London and branches 232
 CHAPTER 1

Introduction

But this long run is a misleading guide to current affairs. In the long run
we are all dead. Economists set themselves too easy, too useless a task if in
tempestuous seasons they can only tell us that when the storm is past the
ocean is flat again.
—J. M. Keynes, ‘A Tract on Monetary Reform’ in Collected Writings of
John Maynard Keynes, IV (Cambridge: CUP, 2013) p. 65.1

The quotation from John Maynard Keynes’ A Tract on Monetary

Reform (1923), that ‘in the long run we are all dead’, is probably the
most misunderstood in economics. It is often naively assumed to be a
carpe diem defence of Keynesian deficit financing during a downturn.
That is, ‘care about the recession we’re in now, rather than about the
long-term cost of borrowing’; or ‘recklessly enjoy the present and let the
future go hang’.2
However, here Keynes was not referring to deficit financing, discus-
sion of which was to come later in another book, The General Theory of
Employment, Interest and Money (1936).3 Instead he was commenting
upon the limitations of the quantity theory of money, the abstract idea
that the general price level in an economy is directly proportional to
either the amount of money in existence or circulation. Keynes was
arguing that while this may be theoretically true in the long run, other
factors might interfere with it in the short run, meaning that the long
run either takes a very long time to arrive or may not occur at all. He was

© The Author(s), under exclusive license to Springer Nature 1

Switzerland AG 2023
C. Read, Calming the Storms, Palgrave Studies in Economic History,
https://doi.org/10.1007/978-3-031-11914-9_1
2 C. READ

thinking of the huge increase in the world’s money supply in 1900–1914

as a result of South African gold mining, which had virtually no impact
on the general price level of the world, because central banks hoarded in
their vaults the extra gold bullion being produced.4
Keynes was not the first economist to argue that the quantity theory
of money ignores the short run. Adam Smith in the Wealth of Nations
(1776) pointed out that it took at least twenty years after the discovery
of the silver mines in Potosí in South America for the consequent increase
in money supply to affect England’s price level.5 Likewise, Thomas
Tooke and John Fullarton of the Banking School, a Victorian group
of economists in the mid-nineteenth century, argued that bullion drains
(which reduce the money supply) may not reduce a country’s general
price level in the short run.6 Their intellectual opponents, the Currency
School, who were strict believers in the quantity theory of money,
thought that they did; bullion drains and crises would eventually resolve
themselves when prices fell and exports increased. The Banking School
saw this as blasé and argued that disequilibrium in the short run was
possible and could have catastrophic effects. In particular, they saw invest-
ment flows that were part of what is now called the Carry Trade—a
trading strategy involving borrowing at a low interest rate in one country
or place to invest in another at a higher rate—as the prime factor behind
crises.
The Carry Trade has not seemed worth consideration by academic
economists in the past because in the long-term it cannot create overall
wealth; the winners are cancelled out by the losers. Only one full-length
book has been written in recent times critically analysing its effects on
financial stability and the wider economy; this one is the second.7 Never-
theless, as market participants and commentators increasingly observe, the
lack of net profits for investors overall in the long run does not stop many
individuals trying to make money from the trade in the short run. The
tragedy is that attempts to profit from the Carry Trade have had impor-
tant negative consequences for economies by helping to cause financial
crises. Worse, those financial crises have had adverse effects on economic
growth, equality and stability.
The contention of this book is that the Carry Trade—always a short-
term phenomenon that only appears under certain circumstances—is also
critical for an understanding of long-run British financial history over the
past 200 years. The rise, fall and return of the Carry Trade should play
an important role in the explanation for why there were regular financial
 1 INTRODUCTION 3

crises between 1825 and 1866, then, outside the world wars, no major
systemically important ones until 1973, before two massive ones in 1973–
1975 and 2007–2009.
If crises are to be mitigated by ‘Calming the Storms’ in the future
as successfully as the Banking School did at the end of the nineteenth
century, the short-term processes that cause crises have to be understood.
When Keynes quipped ‘in the long run we are all dead’, he was pointing
out that the consideration of economic systems in the long term alone
made it too easy to set aside the awkward and inconvenient factors that
had produced short-run periods of instability and disruption over the
previous century.

1.1 The Carry Trade and the Banking School

The Carry Trade has increasingly been connected with financial crises
in recent decades. An investment strategy mainly known to professional
traders, it is a method of making a profit with virtually no capital. Funds
are borrowed or sourced in an area or country with low interest rates
and invested in an area of high interest rates or returns.8 Traders gener-
ally accept that interest rates in different countries will eventually move
together according to the interest-rate parity theory on the basis of arbi-
trage caused by the flow of funds following the Carry Trade or for other
reasons. However, the equalisation of rates may take as long as five years
and until then a profit can be made on the difference between the rates,
as viewed from the country from which the investor operates.9 The risk
involved includes the security of investments in the higher interest-rate
regime, the fluctuations in currency exchange rates which may occur
during the period of investment, and fluctuations in the comparative
interest rates. The risk of exchange-rate variation can be countered by
investors, to some extent, by hedging against future changes and the
inevitable risk that high and low interest rates will move together has been
avoided by careful monitoring of financial data and withdrawing funds
or stopping investment before that event. Yet for all those who make a
profit from the Carry Trade, many make big losses from it because of
‘carry corrections’ or ‘carry crashes’, or episodes when the Carry Trade
suddenly unwinds, and the above hedging strategy does not work.10
It is that very change in investment flows, the unwinding of an invest-
ment position, that has been linked to financial crises. The subject of
the investment will suddenly be deprived of investment and liquidity.11
4 C. READ

Whether the target of the Carry Trade is a long-term infrastructure

project or highly liquid securities such as publicly listed shares and bonds,
the collapse of flows can cause instability both in the place that received
the investment flows and the place that sent them. In addition, investors
that left the withdrawal of their funds too late suffer big losses in asset
values. Examples include the global financial crisis of 2007–2009, and
there are some signs that the same situation has been developing in the
aftermath of the covid-19 crisis.
Yet the Carry Trade and its consequences are not just a phenomenon
that has come to worry economists and investors at the start of the
twenty-first century. The roots of the trade go right back to the nine-
teenth century and the financial crises of that era. The worries of
economists and bankers about the damage the trade could cause first
emerged in that same era. This book traces and exposes those roots, which
are embedded in the Banking School’s opposition to the monetary theory
and banking policy of the Currency School. It was the Currency School’s
ideas that substantially became embedded into British law in the Bank
Charter Act of 1844.
The Banking School, traditionally seen as led by Thomas Tooke, and
including the ‘Free Banking School’ championed by James Wilson, was
a term used to describe a group of bankers, economists, businessmen
and politicians who opposed the 1844 Act with a heterodox variety of
opinions. Generally, they pointed to the financial crises between 1847
and 1866 as the product of the 1844 Bank Charter Act and defects in
the currency and banking system that it had established. The question of
whether this piece of legislation increased or decreased financial stability
in the United Kingdom should be regarded as one of the most impor-
tant questions in modern British history. Three severe crises—in 1847,
1857–1858 and 1866—followed the passing of that Act. However, after
the collapse of Overend, Gurney & Co. in 1866, there were no major
systemically important banking crises in the United Kingdom until the
secondary banking crisis of the 1970s and the global financial crisis of
2007–2009. (The panic of 1914 is usually excluded from this assessment
as it was caused by war not speculation; policymakers also managed to
resolve both that and the sterling crisis of 1931 without any bank runs or
systemically important banking collapses at home.)
This book uncovers the contribution of ideas generated by the
economic thinkers of the Banking School to the development of this
stability in late Victorian Britain. The conclusion of the book is that the
 1 INTRODUCTION 5

disappearance of systemically important banking crises was in part because

the Bank of England adopted many of the Banking School’s prescriptions
about how to manage what would now be called the Carry Trade. In
short, while the Currency School won the battle in 1844, the Banking
School won the war later that century in terms of its influence over the
Bank of England’s policies on interest rates and the management of its
bullion reserves. However, no victory in history lasts forever. This book
goes on to argue that the re-emergence of severe financial crises in 1973
and 2007–2009 was the result of the Bank of England forgetting the
lessons the Banking School had taught it in the nineteenth century about
how to manage the Carry Trade.

1.2 A British Bank Is Run with Precision?

Such a long record of having no major systemic banking crises is almost
without precedent in the modern history of the world’s major economies,
many of which suffered regular banking crises over that same period.
Perhaps the starkest international contrast can be found in the interwar
years: in the depths of America’s Great Depression, in 1933, only 13,500
of the 30,000 banks that had existed in 1920 still survived.12 By contrast,
in Britain, there were hardly any banking failures at all during the entire
interwar period, in spite of the world depression, and none that caused
severe systemic problems.
Since the end of the Bretton Woods exchange-rate agreement, which
was in force between 1944 and 1971, a period in which financial crises
almost disappeared across the world, serious banking crises have become
more frequent.13 The United Kingdom’s spell without crises ended in
the 1970s. The secondary banking crisis of 1973–1975, although system-
ically important, had a very limited impact on ordinary Britons, thanks to
rescue efforts organised by the Bank of England and the larger clearing
banks. Yet it was the global financial crisis, in 2007–2009, which was
truly in scale and importance a return to the more serious events of
the 1840s, 1850s and 1860s. In these Victorian crises, there were fears
the Bank of England might run out of bullion or notes and the whole
British banking system might have to shut down. In 2008 there were
again fears of a sector-wide collapse of banks and the payments system,
though this time as the result of Royal Bank of Scotland’s problems. In
a survey of 800 years of crises published in 2009, Carmen Reinhart and
Kenneth Rogoff blamed a ‘this time is different syndrome’ (when little
6 C. READ

had changed in reality) for the fact that the crisis was for the most part
not anticipated.14 However, whereas many economists and policymakers
have been caught by surprise by the return of severe banking crises in
Britain, the global financial crisis would have looked rather familiar to
many of their Victorian forebears.
Since the global financial crisis, scholars and policymakers, in Britain
as well as around the world, have been looking to the past in order to
find lessons to prevent crises in the future. As severe financial crises in the
United Kingdom disappeared after 1866 for more than a century, can the
same lessons learnt be applied again in the post-financial crash era in the
early twenty-first century? What did the Banking School have to say about
their experience of banking instability in Victorian Britain?
The focus of recent studies has been substantially microeconomic in
nature. In many of these studies the root causes of financial crises have
been identified as asset-price boom and busts caused by investor mania
and irrationality that still needs to be controlled by regulation of bankers’
activities. Their focus, therefore, has been substantially on microeconomic
issues such as the incentive structures for bankers, corporate gover-
nance and the design of banking regulation rather than the effect of
governments and central bankers in creating an unstable macroeconomic
environment for the financial sector.
In 2014 John Turner wrote about how what he saw as a relatively
stable banking system between the 1860s and the late twentieth century
was due to an appropriate passing of risk to shareholders, which was
frustrated in modern times by the withering away of the remaining
liability that bank shareholders still possessed in Victorian times.15 In
2015 Adair Turner, a regulator and a chairman of Britain’s Financial
Services Authority after the global financial crisis, drew attention to a
number of interventionist proposals to manage the growth and allocation
of credit creation: to diluting tax credit as a form of economic pollution,
to boosting the capital of banks, and to the control of lending on real
estate.16 Nicholas Dimsdale and Anthony Hotson’s useful collection of
essays on crises in Britain suggests that the dismantling of credit controls
which started during the 1970s is at the root of the problem with the
inference that this was a reflection of railway mania in the 1840s.17
Ranald Michie’s interesting study of the City of London over the
period of the rise and fall of banking instability in Britain suggests
that changing cultural attitudes towards the attractiveness of maturity
transformation—in other words whether financial institutions should use
 1 INTRODUCTION 7

short-term lending to make long-term loans and then sell them on—may
have played a key role.18 The lesson from the nineteenth century was that
banks making long-term investments should avoid short-term wholesale
markets as the source for lending rather than long-term deposits; the exact
lesson Northern Rock forgot, resulting in a bank run in September 2007
that was the first high-profile bank run on any British financial institution
since the crisis of 1866.19 Michie commented that ‘The lessons learnt
over the space of 150 years had been undone in ten’.20
More recently still, in a book published in 2020, based substantially on
episodes in British financial history, William Quinn and Turner conceived
of bubbles as requiring a triangle of three factors: marketability, specula-
tion and cheap credit.21 A bubble requires an asset that can be bought
and sold, cheap credit to fuel the buying of the asset and investors (often
amateur or novice ones) willing to speculate on its future appreciation
in value.22 As the underlying assets that are the subject of bubbles can
be used as the underlying collateral for loans, the financial system can be
vulnerable to when the bubbles pop. The collapse of many such bubbles,
which begin when one side of the triangle of causes suddenly disappears,
can trigger banking crises, such as the role the implosion of the housing
bubble in parts of America and Europe had at the start of the global
financial crisis of 2007–2009.23
Yet although the rise and fall of banking stability in Britain is often
discussed in terms of the structure of the financial sector or the incentives
that bankers are given by regulators or by corporate governance struc-
tures, macroeconomic policy matters for two of the three sides of the
triangle: for cheap credit and speculation. Both are not always naturally
occurring and can be the result of policy decisions. Cheap credit condi-
tions can be created by governments implementing financial repression to
cut the cost of servicing a huge national debt and by the Bank of England
cutting interest rates. That, in turn, can fuel speculation. As Quinn and
Turner themselves note, paraphrasing Walter Bagehot, the great chroni-
cler of Victorian financial markets, ‘investors would often rather invest in
something ridiculous than accept a low interest rate on a safe asset’—a
desire fuelled when policymakers keep rates too low.24 The idea that poli-
cymakers often have a role in creating the credit booms and busts that
led to crises is one of the great insights provided by the Banking School,
an angle that this book explores in detail over the past two centuries of
British financial history.
8 C. READ

A lot has been written about the Bank of England, by official histo-
rians and other scholars. However, this literature has often shied away
from criticising many of the Bank’s actions during previous crises—some-
thing which may not be entirely a surprise seeing that much of it has
been written by current or former employees of the Bank itself.25 For
instance, it has rarely been noted that the Bank of England contributed
to the crises of 1847 and 1857–1858 by keeping interest rates too low
for too long in attempts to boost its market share in the discount market,
and in doing so imperilled wider financial stability; nor that its actions in
1866 also conveniently disposed of its main rival in the discount market,
Overend, Gurney & Co. This has produced a bias, which has not been
fully or explicitly justified, in some of the more recent literature in favour
of the ideas of the Currency School, whose adherents in the nineteenth
century tended to campaign in support of the Bank’s privileges.26 Interest
in the ideas of the Banking School has been relatively neglected in recent
decades, with the notable exception of Matthew Smith’s work that has
excavated the monetary thought of Thomas Tooke.27 Scholars have yet
to fully piece together the Banking School’s ideas on what would now be
called the Carry Trade, how this type of speculation contributed to finan-
cial crises in the nineteenth century, and how managing the Carry Trade
better could prevent similar policy errors and crises in the future. These
are the three tasks this book sets out to achieve.
The Banking School’s ideas have partly been obscured by the slow
progress of economic historians in uncovering the history of how the
macroeconomic weather in Victorian Britain affected the financial sector.
That is, how policies made by government and decisions made by central
bankers may have affected the incentives of the financial community, and
whether this fuelled boom and busts that triggered the banking crises that
scar the economic history of this period. Both economists and historians
have tended to avoid this subject. Some ‘standard’ scholarly literature on
the financial crises of 1847 and 1857–1858 was written as long ago as
the 1950s and was influenced by the ideological preoccupations of the
time about the merits of the gold standard.28 A notable exception was
Mac (H. M.) Boot’s analysis of the 1847 crisis dating from 1984 which
correctly identified the macroeconomic effects of the Irish famine and
‘large speculative flows of bullion’ between London and New York as
throwing the Bank of England’s currency system ‘off course’.29 It is my
reassessment of the causes of the crises of 1847, published as The Great
Famine in Ireland and Britain’s Financial Crisis (2022), that provided
 1 INTRODUCTION 9

the inspiration and first case study for the reassessment in this book of
200 years of British financial history.30
The reason for the lack of interest in this topic may be because of the
growing disciplinary divide between economists and historians. Studies of
British financial history using a historical-institutional approach have fallen
out of favour in university economics departments since the 1960s, as Alec
Cairncross has described, in favour of ‘much more rigorous mathematical
models, though ones which tend to assume a given and constant institu-
tional background and whose underlying assumptions often hardly bear
detailed scrutiny’.31 Books seeking to put the Bank of England’s policies
in their historical and institutional context, such as Sir Ralph Hawtrey’s
The Art of Central Banking (1932) and A Century of Bank Rate (1938)
or Richard Sayers’s Central Banking (1957), are no longer produced by
economists in university departments, even though, since these publica-
tions, a plethora of new archives and data has appeared for economists
to work on.32 Neither have economists found that the Banking School’s
ideas render themselves readily accessible to econometric analysis of long-
term series. Meanwhile, most historians feel that they cannot add to the
discussion without complex statistical computations, which most do not
have the skills to undertake. To do real justice to the subject requires
a historian’s experience in digging in the archives combined with an
economist’s rigour when it comes to econometric analysis of the avail-
able economic and financial data. It is from this methodological starting
point that this book springs.

1.3 Current Research in Economic History

Economic historians of Victorian Britain have instead turned their atten-
tion to three other macroeconomic areas of inquiry. The first is the debate
over the speed and nature of the British industrial revolution at its zenith.
The second is the debate over the reasons and the extent to which the
growth performance of the British economy declined compared to those
of its principal competitors later in the nineteenth century. These two
subjects have swallowed up a lot of research time among British economic
historians based in university economics departments, as well as reams of
undergraduate essays. The third, which is a particular focus of scholars in
history departments, is the provenance of sound finance (or ‘Gladstonian
finance’) and the unilateral free-trade policies pursued after the repeal of
the Corn Laws in 1846.
10 C. READ

All three questions ultimately concern long-term economic growth and

development. However, what has been neglected in these three areas of
investigation is how short-term events, such as banking or financial crises,
although short-lived, can dramatically affect the long run.
Since the global financial crisis of 2007–2009, the thrust of recent
research in economic history, in general, has been to place more impor-
tance on the consequences of crises. It has been realised that economic
growth in the long run is not all directly about long-run growth, as it
were, elegantly presented with long-run growth models developed in the
economics textbooks of the last half-century or so. Economic slumps,
recessions and crises diminish growth, can permanently affect the devel-
opment of an economy, and therefore need to be at the centre of historical
narratives, even those about the long run. As many people who have lived
through the global financial crisis can attest, such events and their conse-
quences, including the austerity measures that often follow in their wake,
can affect lived experiences, change lives, end lives and permanently blight
the future for an individual or an entire economy. That applies to the
nineteenth century as much as it does the twenty-first. For instance, the
financial crises of 1847 in London made it harder to raise loans for Irish
relief during the Great Famine, triggering cuts in spending that probably
raised excess mortality by hundreds of thousands of lives and perma-
nently reduced Ireland’s population.33 Consequent accusations by Irish
nationalists that the British response to the famine was inadequate fuelled
separatism that eventually resulted in the independence of the Irish Free
State from the United Kingdom in 1922. The panics that triggered the
1847 crises were particularly short-lived, but British and Irish people still
live with its long-term consequences today, 175 years on.34
The impact of short-term crises on the long term is increasingly recog-
nised by economic historians. Most notably, Reinhart and Rogoff, in
their book mockingly entitled This Time is Different (2009), argued that
banking crises have longer term effects that other downturns do not.35
Financial crises cause much longer and slower recovery paths than ordi-
nary recessions in which there are no banking collapses. More recently
still a series of papers by Stephen Broadberry and John Wallis have
undermined the idea that long-term economic growth should be about
growth at all. They have taken data for 18 countries in Europe and the
New World, some from as far back as the thirteenth century. To their
surprise, they found that growth during years of economic expansion has
fallen in the recent era—from 3.88% between 1820 and 1870 to 3.06%
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ALL TITLES ALWAYS IN PRINT

173 Zenobia’s Suitors By Mrs. E. D. E. N.

— Sequel to “Sweet Love’s Southworth
Atonement.”
172 Sweet Love’s Atonement By Mrs. E. D. E. N.
— Southworth
171 When Shadows Die By Mrs. E. D. E. N.
— Sequel to “Love’s Bitterest Cup.” Southworth
170 Love’s Bitterest Cup By Mrs. E. D. E. N.
— Sequel to “Her Mother’s Secret.” Southworth
169 Her Mother’s Secret By Mrs. E. D. E. N.
— Southworth
168 The Mysterious Marriage By Mrs. E. D. E. N.
— Sequel to “A Leap in the Dark.” Southworth
167 A Leap in the Dark By Mrs. E. D. E. N.
— Southworth
166 Fulfilling Her Destiny By Mrs. E. D. E. N.
— Sequel to “When Love Southworth
Commands.”
165 When Love Commands By Mrs. E. D. E. N.
— Sequel to “The Widows of Southworth
Widowville.”
164 The Widows of Widowville By Mrs. E. D. E. N.
— Southworth
163 Unrequited Love By Mrs. E. D. E. N.
— Sequel to “For Woman’s Love.” Southworth
162 For Woman’s Love By Mrs. E. D. E. N.
— Southworth
161 To His Fate By Mrs. E. D. E. N.
— Sequel to “Dorothy Harcourt’s Southworth
Secret.”
160 Dorothy Harcourt’s Secret By Mrs. E. D. E. N.
— Sequel to “A Deed Without a Southworth
Name.”
159 A Deed Without a Name By Mrs. E. D. E. N.
— Southworth
158 Brandon Coyle’s Wife By Mrs. E. D. E. N.
— Sequel to “A Skeleton in the Southworth
Closet.”
157 A Skeleton in the Closet By Mrs. E. D. E. N.
 — Southworth
156 For Whose Sake? By Mrs. E. D. E. N.
— Sequel to “Why Did He Wed Southworth
Her?”
155 Why Did He Wed Her? By Mrs. E. D. E. N.
— Southworth
154 David Lindsay By Mrs. E. D. E. N.
— Sequel to “Gloria.” Southworth
153 Gloria By Mrs. E. D. E. N.
— Southworth
152 The Test of Love By Mrs. E. D. E. N.
— Sequel to “A Tortured Heart.” Southworth
151 A Tortured Heart By Mrs. E. D. E. N.
— Sequel to “The Trail of the Southworth
Serpent.”
150 The Trail of the Serpent By Mrs. E. D. E. N.
— Southworth
149 The Struggle of a Soul By Mrs. E. D. E. N.
— Sequel to “The Lost Lady of Southworth
Lone.”
148 The Lost Lady of Lone By Mrs. E. D. E. N.
— Southworth
147 Her Love or Her Life? By Mrs. E. D. E. N.
— Sequel to “The Bride’s Ordeal.” Southworth
146 The Bride’s Ordeal By Mrs. E. D. E. N.
— Southworth
145 Lilith By Mrs. E. D. E. N.
— Sequel to “The Unloved Wife.” Southworth
144 The Unloved Wife By Mrs. E. D. E. N.
— Southworth
143 Em’s Husband By Mrs. E. D. E. N.
— Sequel to “Em.” Southworth
142 Em By Mrs. E. D. E. N.
— Southworth
141 Reunited By Mrs. E. D. E. N.
— Sequel to “Gertrude Haddon.” Southworth
140 Gertrude Haddon By Mrs. E. D. E. N.
— Sequel to “A Husband’s Southworth
Devotion.”
139 A Husband’s Devotion By Mrs. E. D. E. N.
— Sequel to “The Rejected Bride.” Southworth
138 The Rejected Bride By Mrs. E. D. E. N.
— Sequel to “Gertrude’s Sacrifice.” Southworth
137 Gertrude’s Sacrifice By Mrs. E. D. E. N.
— Sequel to “Only a Girl’s Heart.” Southworth
136 Only a Girl’s Heart By Mrs. E. D. E. N.
— Southworth
134 Little Nea’s Engagement By Mrs. E. D. E. N.
— Sequel to “Nearest and Dearest.” Southworth
133 Nearest and Dearest By Mrs. E. D. E. N.
— Southworth
81— The Artist’s Love By Mrs. E. D. E. N.
Southworth
53— Capitola’s Peril By Mrs. E. D. E. N.
Sequel to “The Hidden Hand.” Southworth
52— The Hidden Hand By Mrs. E. D. E. N.
Southworth
42— The Mystery of Raven Rocks By Mrs. E. D. E. N.
Sequel to “Unknown.” Southworth
41— Unknown By Mrs. E. D. E. N.
 Southworth
40— Tried for Her Life By Mrs. E. D. E. N.
(Vol. II. The Holloweve Mystery) Southworth
Sequel to “Cruel as the Grave.”
39— Cruel as the Grave By Mrs. E. D. E. N.
(Vol. I. The Holloweve Mystery) Southworth
38— Victor’s Triumph By Mrs. E. D. E. N.
Sequel to “A Beautiful Fiend.” Southworth
37— A Beautiful Fiend By Mrs. E. D. E. N.
Southworth
36— A Noble Lord By Mrs. E. D. E. N.
Sequel to “The Lost Heir of Southworth
Linlithgow.”
35— The Lost Heir of Linlithgow By Mrs. E. D. E. N.
Southworth
34— The Lady of the Isle By Mrs. E. D. E. N.
Southworth
33— The Bride’s Fate By Mrs. E. D. E. N.
Sequel to “The Changed Brides.” Southworth
(Vol. II. Winning Her Way)
32— The Changed Brides By Mrs. E. D. E. N.
(Vol. I. Winning Her Way) Southworth
31— The Doom of Deville By Mrs. E. D. E. N.
Southworth
30— The Broken Engagement By Mrs. E. D. E. N.
Southworth
29— The Three Beauties; By Mrs. E. D. E. N.
or, Shannondale Southworth
28— How He Won Her By Mrs. E. D. E. N.
Sequel to “Fair Play.” Southworth
 (Vol. II. Britomarte)
27— Fair Play By Mrs. E. D. E. N.
(Vol. I. Britomarte) Southworth
26— Love’s Labor Won By Mrs. E. D. E. N.
Southworth
25— Eudora; or, The False Princess By Mrs. E. D. E. N.
Southworth
24— The Two Sisters By Mrs. E. D. E. N.
Southworth
23— The Bridal Eve By Mrs. E. D. E. N.
Southworth
22— The Bride of Llewellyn By Mrs. E. D. E. N.
Sequel to “The Widow’s Son.” Southworth
(Vol. II. Left Alone)
21— The Widow’s Son By Mrs. E. D. E. N.
(Vol. I. Left Alone) Southworth
20— The Bride’s Dowry By Mrs. E. D. E. N.
Southworth
19— The Gipsy’s Prophecy By Mrs. E. D. E. N.
Southworth
18— The Maiden Widow By Mrs. E. D. E. N.
Sequel to “The Family Doom.” Southworth
17— The Family Doom By Mrs. E. D. E. N.
Southworth
16— The Fortune Seeker By Mrs. E. D. E. N.
Southworth
15— The Haunted Homestead By Mrs. E. D. E. N.
Southworth
14— The Christmas Guest By Mrs. E. D. E. N.
Southworth
13— The Three Sisters By Mrs. E. D. E. N.
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12— The Wife’s Victory By Mrs. E. D. E. N.
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11— The Deserted Wife By Mrs. E. D. E. N.
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10— The Mother-in-Law; By Mrs. E. D. E. N.
or, Married in Haste Southworth
9— The Discarded Daughter; By Mrs. E. D. E. N.
or, The Children of the Isle Southworth
8— The Lost Heiress By Mrs. E. D. E. N.
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7— Vivia; By Mrs. E. D. E. N.
or, The Secret of Power Southworth
6— The Curse of Clifton By Mrs. E. D. E. N.
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5— The Missing Bride By Mrs. E. D. E. N.
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1— Retribution By Mrs. E. D. E. N.
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