Takeaways from an 1857 meltdown.

In the fall of 1857, the Bank of England faced a big problem. Its bullion reserves were slipping away, thanks to financial problems and bank failures in the United States and Scotland and the jitters brought on by the Crimean War. By law, the value of its bullion determined how much paper currency it could issue, so the bank's dwindling inventory was causing it to cancel some of its notes. On Nov. 5, bank directors took a dramatic step: They raised the bank's "rate of discount"—effectively, the interest rate that it charged other banks for borrowing money—from an already high 8 percent to 9 percent. After a few days, that went up to 10 percent. The bank's hope was that if lending slowed down at least for a little while, market conditions might calm down, and the bank could stabilize its bullion-to-paper ratio to the point where it could issue currency and credit on more favorable terms.

London's correspondent for the New York Tribune was not impressed. He did not believe the dynamic between the bank's capital reserves and value of its paper would work out the way the bank planned. "It is self-evident," the correspondent wrote, "that the drain of bullion and the decrease of the reserve of notes act mutually upon one another." Why? Because the raising of the "discount rate" would create a mini-panic. Bank depositors (many of whom were themselves private banks) would take their money elsewhere, in hopes of making money by lending it out. That decrease in the bank's reserves would then induce other depositors to leave. "The very measures taken to keep up the reserve, tend to exhaust it," the Tribune writer concluded.

Oh—did I mention that the Tribune writer was Karl Marx?

The rival New York Times—denying or perhaps not seeing the Tribune's point—was incredulous. "Business can be done at a profit in England when the rate of discount is carried up to 7 per cent, the habitual rate being 5-while in this country the rates of discount oscillate ... between the extremes of 10 and of 30 per cent in ordinary times," scoffed the paper. "To expect, therefore, anything like a wide-spread crash of industry, and enterprise in England ... is simply absurd."

Absurd it may have been. But by the time the Times's dismissive story had been written, the law regulating the bank had been suspended. The bank had been forced to deliver gold bullion to prop up numerous bank failures in England and Scotland. Simultaneously, demands for loans were coming in from around the world to the tune of millions of pounds a day. Parliament had to intervene, and the bank was allowed to issue 2 million pounds worth of notes beyond the legal limit. By the end of the year, the crisis had subsided, but global damage had already been done, with bankruptcies, business closures, and a freezing of lending.

The normally grouchy Marx was delighted, less because the crisis signaled the fall of world capitalism than because he'd gotten a scoop. (At any rate, a global recession still seemed within reach, with the United States in recession, the Austrian emperor looking shaky, and a major rebellion against British rule in India.) He dashed off a letter to his friend Friedrich Engels about how "gratifying" it was to be right when the Times was wrong and then fell back into trying to figure out the parameters of the crisis.