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Learning from Mistakes: How the 1825 Crisis Led to Advances in Macroeconomics

Year: 2025
Type: article
Abstract: This is an accepted article with a DOI pre-assigned that is not yet published.This paper builds on Sissoko (2022), which demonstrated that by 1810 the English economy was undergirded by bank credit-based monetary system. This paper reviews in detail the policies adopted by Bank of England in the decade between the end of the Napoleonic Wars and the 1825 crisis. Certain policies, such as the abrupt withdrawal from circulation of small notes from April 1821 to April 1822, provide evidence regarding the Bank directors’ limited understanding of the nature of the credit-based banking system and its effects on the macroeconomy. We show that, just as modern crises transform our understanding of the financial system, there is substantial evidence that the 1825 crisis promoted advances in economic thought (i) by making clear the Bank’s effect on credit extension throughout the country and the associated macroeconomic fluctuations, (ii) by teaching the Bank the importance of stabilising the money supply (iii) by advancing the understanding of the role of the lender of last resort, and finally (iv) by stimulating a precocious theorist to advance a full-fledged theory of fiat money that was widely circulated at the time. This paper also makes clear the essential role of the development of a modern banking system, where bank liabilities comprise a significant portion of the circulating money supply and bank lending therefore plays an important role in monetary dynamics, in our understanding of macroeconomics. In particular, the onset of the macroeconomic fluctuations known as the business cycle are closely associated with the fluctuations in bank liabilities that only occurred in the presence of a modern banking system.
DOI: 10.16995/rhetm.24101
Language: English
Open Access status: diamond
OpenAlex ID: W7101446302
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Cites: 13
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