And it all comes crashing down

When the bubble burst in April 1825 commercial failures followed. This coupled with the usual seasonal stress the country banks usually felt lead to the failing of some country banks. The country banks multiplied during the war years, and the over issued notes. Problems began to appear in the autumn, banks started to fail. A run began. Under the strain the country banks turned to their London counterpart. As the strain was passed down the chain, much like an illness spreading, the London banks had little option but to turn to the Bank of England with their hands open.

By the time it rolled round to December a number of larger banks, which were slightly more important in the grand scheme of things, had failed in London. The bank of Wentworth, Chaloner & Rishworth failed on December the 8^th 1825 and the bank of Pole, Thornton & Co. failed on the 13^th of December.

Marianne Thornton, who was Henry Thornton's (Of Pole, Thornton & Co) older sister told a friend of hers through letters that on one day in 1825 there was a run on the bank wherein  “one old steady customer” came into the bank and withdraw his entire account of £30,000.  That day Henry Thornton, who was the youngest partner in the bank at the age of 25, realised that by close of the day "they would have to pay 33,000 and they should only receive 12,000."

The Bank of England agreed to give them 400,000 pounds, in effect acting as a lender of last resort. However this did not stop the run on the bank. The money had been lent in secret so as other banks would not come to the bank of England with cap in hand looking for money to keep them afloat. The loan of money to Pole, Thornton & Co was not enough to keep them afloat and they failed by the end of the week. 73 banks in England failed.

By this stage the Bank of England had realised that they couldn't let the banks of London fail.  The bank of England would have to step in to rectify the situation and this meant acting as  a lender of last resort. Bagehot is reported to have said "After a day or two of this treatment, the entire panic subsided, and the 'City' was quite calm."

In all the chaos in the city as the bubble burst investors pulled money out of the speculative stocks. These included the mines in Latin America, many which were fraudulent and failures in the first place. This led to the countries not being able to honour their debt, Peru was the first to default in 1826.  The shiny new bonds, curtsey of the new states in Latin America, meant Britain lost its default innocence in relation to sovereign states. All states on the continent defaulted as investors pulled their money out, except for Brazil. That was mostly due to the fact that Portugal still owned it. The flow of capital to the Latin American countries took decades to return to normal. 


After this crisis there was a number of changes implemented in the British banking system. Wilfred T.C. King identified four changes. These were the beginnings of joint stock banking, Establishment of Bank of England Branches, assumption of central banking functions by the Bank of England and the cessation of re-discounting by the London private banks. (Neal, 1998)