Panic of 1825: First Emerging Markets Crisis

1825 was a year filled with bubbles and manias stemming from low interest rates and cheap credit. This low-rate environment resulted from the government’s interest in keeping rates low following a very expensive period of conflict (the Napoleonic Wars). Lower rates meant lower debt payments. However, this impacted investors relying upon consols (government bond equivalents) for income, as lower yields reduced their income from interest payments. Similar to today, these investors were forced into riskier and higher-yielding assets in a “reach for yield” scenario.


At the same time, many Latin America and South American countries were gaining independence from Spain, and beginning to issue high-yielding sovereign debt (sometimes as high as 15%). British investors starved for income from low consol yields rushed into these Emerging Market bonds. This speculative fervor eventually expanded into Latin American mining stocks and new UK joint-stock companies. The period was riddled with fraudulent schemes and startups launched to take advantage of speculator’s enthusiasm. One example was the Resurrection Metal Company, “which intended to salvage underwater cannonballs that had been used at Trafalgar and other naval battles”.


The craze ended as rates were raised, money markets tightened, and a wave of bank failures brought the party to a halt.


Read More: The Panic of 1825: In Quest of Aztec Gold