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Contagion and Intervention in the 1772-3 Credit Crisis

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The 1772-3 credit crisis impressed its contemporaries both for its suddenness and for arising during a time of relative peace and robust economic growth. It furthermore displayed an impressive geographical range, affecting a large portion of the eighteenth century financial network including England, Scotland, the Netherlands, and the West Indian and North American colonies. These characteristics make this crisis a particularly attractive candidate for investigating the existence and mechanisms of financial contagion in this era, a concept that is both overused and often nebulously defined in the literature. It has been furthermore claimed that the crisis displayed an early instance of a Lender of Last Resort (LOLR) in action, some thirty years before the classical formulation of the concept by Henry Thornton, and a full century before Walter Bagehot’s Lombard Street. This paper will employ contemporary manuscript evidence to investigate whether financial contagion was really at work in 1772-3, and will describe its possible routes of transmission. It will furthermore identify the agents and mechanisms of market intervention, both for providing liquidity to the market in the classic LOLR tradition of Thornton and Bagehot, and for organising outright bailouts of failing firms and individuals. It will finally discuss whether such intervention was done consciously and with the limitation of systemic risk in mind, or whether it was mainly influenced by political and other considerations.

This talk is part of the Financial History Seminar series.

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