Saturday, March 10, 2018

New York Fed: "The Crisis of 1816, the Year without a Summer, and Sunspot Equilibria"

A repost from October 2014.

New York Fed: "The Crisis of 1816, the Year without a Summer, and Sunspot Equilibria"

From the Federal Reserve Bank of New York's Liberty Street Economics blog:
In 1815, England emerged victorious after what had been nearly a quarter century of war with France. And during those years, encouraged by high prices and profits, England greatly expanded its agricultural and industrial capacity in terms of land and new machinery, with these activities often financed on credit. Improved harvests from 1812 to 1815 coincided with an export market boom in 1814, as the continent began to reopen for trade and speculation in South America increased. But the speculation turned to frenzy compared to the boom of 1810 as everything that could be shipped was shipped—until the speculation broke. The crisis started first with farmers and landlords, spread to business and industry, and was followed by mass starvation on the continent. In this edition of Crisis Chronicles, we recount the Crisis of 1816, the Year without a Summer, and the idea of Sunspot Equilibria.

“Relief of Our Present Embarrassments” (Thomas Attwood)
Harvests were poor and agricultural prices high in England prior to 1812. But from 1812 to 1815, harvests improved and the abundance of crops, as well as prospects for peace after two decades of Napoleonic wars, held down prices. In 1815, England had a strong harvest. There was plenty to sell, but that kept prices low, often too low to cover the cost of cultivation, so there was little left to pay rents. As Whig politician and champion of agricultural interests Charles Western noted, the primary cause of the decline in prices was “the redundant supply in the markets, a supply considerably beyond the demand, and that created chiefly by the produce of our own agriculture.” To help boost demand for domestic crops, laws were enacted to prohibit the import of low-cost wheat from the continent.

England also had plans to be a world supplier and for that, it needed a world market. However, both the continent and America were also eager to compete and so a general commercial distress began to prevail in England owing to the increased competition from abroad. The price of iron fell, some manufacturing closed, and those who had extended credit were distressed. And with agriculture prices too low to pay rents, many farms were abandoned, mortgaged lands lay fallow, and banks were left without payment and with land they couldn’t use.

     By 1815, as the agricultural distress worsened, trade stagnated and money became scarce. The abundance of ex-soldiers and newly unemployed farmers meant that there was starving among the unemployed. Violent outbreaks by unemployed workers in April and May of 1816 became known as the “bread or blood” riots. In a famous pamphlet of the time, Thomas Attwood, a Tory banker, asked, “What secret principle of mischief has been operating to counterwork the strong bias of society to improvement, and to undermine the foundations of the national wealth?”

     Meanwhile, amid the disturbances, the demand for wheat on the continent increased and the price crept up in April and May 1816.

1816: The Year without a Summer
The financial and economic difficulties associated with the end of the Napoleonic wars were exacerbated by extremely cold, dark weather across northern Europe and the northeastern United States in 1816. The poor weather was caused by the eruption in the Dutch East Indies (Indonesia) of Mount Tambora, which spewed smoke and ash into the atmosphere, obscuring the sun. So severe was the weather that snow was recorded in Albany, New York, and in cities in northern Europe—in July. The cold and dark caused widespread crop failures and severe famine across the Northern Hemisphere, and 1816 became known as the “Year without a Summer” and the “Poverty Year.” People were observed eating “bread” of sawdust and straw. Lord Byron commemorated the calamity with a poem, “Darkness.”...MORE 
Also at Liberty Street, the post I was originally going for:
What Can We Learn from Prior Periods of Low Volatility?