Calming the Storms: The Carry Trade, the Banking School and British Financial Crises Since 1825 (Palgrave Studies in Economic History)

This book exposes, for the first time in modern scholarship, the role that the rise of the Carry Trade played in British financial crises between 1825 and 1866, how in reaction the Bank of England improved its management of monetary policy after 1866 and how those lessons have been forgotten since the 1970s. Britain is one of the few major capitalist economies in the world to have avoided policy-induced systemic financial crises for more than 100 years of its history--between 1866 and 1973. Beforehand, it suffered a series of serious banking panics, in 1825, 1837, 1847, 1857-58 and 1866. Since the 1970s banking instability has returned again, with the global financial crisis of 2007-09 hitting Britain hard. Economists and policymakers have asked what can be learnt from Britain's experience of the disappearance and reappearance of crises to help efforts to prevent future ones. This book answers that question with a major reassessment of Britain's financial history over the past two centuries. It does so by applying the long-neglected ideas of the British Banking School to explain how crises can occur because of the Carry Trade. This book is essential reading for economists and historians of modern Britain, practitioners and policymakers, as well as anyone who is affected by financial crises and their consequences. Charles Read is a British Academy Postdoctoral Fellow in History and an Affiliated Lecturer in Economics and History at the University of Cambridge. He is also a Fellow, Tutor, College Lecturer and Director of Studies at Corpus Christi College and a Research Associate at the Centre for Financial History at Darwin College. His previous research has won the Thirsk-Feinstein PhD Dissertation Prize, the T.S. Ashton Prize, and the New Researcher Prize of the Economic History Society and a prize from the International Economic History Association for the best doctoral dissertation completed in 2015, 2016 or 2017. He has also worked as a writer and editor at The Economist and as a research associate at an investment bank in London Acknowledgements Contents Abbreviations List of Figures List of Tables 1 Introduction 1.1 The Carry Trade and the Banking School 1.2 A British Bank Is Run with Precision? 1.3 Current Research in Economic History 1.4 The Monetary Thought of the Non-conformist Conscience 1.5 Re-introducing the Banking School Notes 2 Peel’s Economic-Policy Regime Change in Britain During the Early Nineteenth Century 2.1 Peel’s Policies 2.2 Opening up Trade 2.3 Currency 2.4 Interest Rates 2.5 Conclusion Notes 3 The Ideas and Policies of the Banking School 3.1 The Banking School as a Reaction Against Peel’s Policies 3.2 The Banking School and Interest Rates 3.3 Testing the Banking School’s Theories with Charts 3.4 Testing the Banking School’s Theories with Econometrics 3.5 Summary of Conclusions Notes 4 The Crises of 1825 and 1837–1839 4.1 1825: An Overview of the First Crisis of the Gold Standard Era 4.2 The Run-Up to the 1825 Crisis 4.3 The Bullion Drain of 1810 4.4 The Drain of 1816–1818 4.5 The Drain of 1825 4.6 The Wider Consequences of the 1825 Crisis 4.7 The Crises of 1837–1839 4.8 The Effect of the Slavery Abolition Act of 1833 4.9 The Two Schools and the 1830s Crises 4.10 Consequences of the 1830s Crises Notes 5 The 1847 Crises 5.1 An Overview of the Crises 5.2 The First Phase of the Crisis 5.3 The Second Phase of the Crisis 5.4 The Consequences of the Crisis Notes 6 The 1857–1858 Crisis 6.1 The Currency School’s and Banking School’s Ideas in the 1850s 6.2 An Overview of the 1857–1858 Crisis 6.3 Bullion Flows to France and the Continent 6.4 Capital Flows and the United States 6.5 Capital Flows to Egypt, India and China 6.6 The Worst Period of the Crisis 6.7 The Consequences of the Crisis Notes 7 The Uncertainties of the 1860s and the Crisis of 1866 7.1 The Banking School and the Crisis of 1866 7.2 The Background to the Crisis of 1866 7.3 The American Civil War and the Cotton Industry 7.4 Europe and the Crisis of 1864 7.5 The Indian Connection to the Crisis of 1866 7.6 Limited Companies or Interest Rates? 7.7 Consequences of the Crisis Notes 8 The Fading Away of Crises After 1866 8.1 An Overview of the Period 8.2 The Build-Up to Problems in 1873 8.3 The Peak of the 1873 Mini-Crisis 8.4 Mini-Crises in the Remainder of the Nineteenth Century 8.4.1 1878 8.4.2 1882 8.4.3 1884–1885 8.4.4 1888 8.4.5 1890 8.4.6 The Late 1890s Notes 9 The Twentieth and Twenty-First Centuries: From the Banking School to the Carry Trade 9.1 Lessons from the Banking School’s Ideas 9.2 The Carry Trade and Economic Theory 9.3 Carry Trades, Interest Rates, Capital Flows and Crises 9.4 The Interwar and Post-War Years 9.5 The Secondary Banking Crisis of 1973–1975 9.6 The Crisis of 2007–2009 9.7 The Covid-19 Pandemic and Beyond 9.8 Policy Prescriptions Notes 10 Conclusion: Calming the Storms 10.1 Going Back and Forth for Two Centuries 10.2 The Disappearance and Reappearance of British Banking Crises 10.3 The Carry Trade in British History Notes Appendix: Details of Econometric Analysis in Chapter 2 Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 2.6 Table 2.7 Table 2.8 Table 2.9 Table 2.10 Bibliography Index