The Bank for International Settlements has published a working paper examining the 1805 to 1806 financial crisis after the Battle of Trafalgar as a historical case of an exogenous global liquidity shock. The paper argues that Europe’s loss of access to Latin American silver, then the main international safe asset and source of high-powered money, created a global liquidity squeeze that drove a financial panic, sharply reduced intermediation and disrupted banking, credit and trade across Europe. In Paris, the Banque de France cut lending by nearly 50 percent within three months as it tightened credit to hoard specie and defend confidence in its notes. The paper classifies the episode as a Kindleberger gap and says the silver shortage had three main effects. It triggered a cascade of bank failures, including no fewer than 20 Parisian banks, caused a shortage of means of payment that curtailed economic activity, and marked the end of Latin American silver’s dominance in the international monetary system. Stress spread through rising silver prices, pressure on the metallic reserves of other central banks including the Banco de San Carlos in Madrid, and disruptions in bills of exchange markets from Cádiz to Hamburg. Drawing on daily and weekly balance sheet data, the authors say the Banque de France increased the metallic coverage of its notes by a factor of four between November 1805 and October 1806, while monetary silver in its coffers rose from 10 million to 60 million francs, reinforcing the contraction in money and credit. The paper concludes that a safe asset’s status depends on both resilient supply and the credibility of its issuer. The publication notes that the views expressed are those of the authors and not necessarily those of the BIS or its member central banks.
Bank for International Settlements 2026-05-13
Bank for International Settlements publishes research finding the 1805 silver shortage cut Banque de France lending by nearly 50 percent and triggered wider European stress
The Bank for International Settlements has published a working paper on the 1805–1806 financial crisis after the Battle of Trafalgar as a case of an exogenous global liquidity shock from Europe’s loss of Latin American silver. The study links the silver shortage to bank failures, a sharp contraction in money and credit, and the end of Latin American silver’s dominance as the main international safe asset, highlighting how the Banque de France’s aggressive hoarding of specie amplified the squeeze. It concludes that a safe asset’s status depends on both resilient supply and the credibility of its issuer.