Country banks and the Panic of 1825

Abstract

The Panic of 1825 was a significant crisis in British financial history. We document how this crisis spread from London banks to England’s real economy. England’s correspondent banking network propagated trouble in sovereign debt markets to small banks outside of London and ultimately to non-financial firms. Using exogenous variation in district-level exposure to the crisis, we show that bank failures led to a substantial number of bankruptcies among non-financial firms. We discuss two potential mechanisms by which the financial system affected the real economy: a fall in aggregate demand and a credit supply shock.