Liberty Street Economics

« Cross-Country Evidence on Transmission of Liquidity Risk through Global Banks | Main | What Can We Learn from Prior Periods of Low Volatility? »

October 03, 2014

Crisis Chronicles: The Crisis of 1816, the Year without a Summer, and Sunspot Equilibria



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.”

     The famine caused many German and Swiss residents to flee certain starvation by traveling to Russia and the Americas, while Italians flocked to the cities. Hundreds of thousands died from the combined effects of typhus, exposure, and starvation. Food prices increased dramatically by 1817 and this led to one of the first direct public interventions in failed markets, as local governments coordinated food imports to feed the starving. However, not all were in favor of public aid. British political economist David Ricardo argued that funds raised for employing destitute people were wastefully diverted from “other productive employment.” But the imports did help U.S. grain exports by 1817, and may have contributed to the Panic of 1819—but we’ll cover that in our next post.

A Sunspot Equilibrium? Not Really
The “Poverty Year” may have been aggravated by historically low sunspot activity around 1816. As explained by Soon and Yaskell, sunspots are manifestations of the amount of solar magnetic activity. Somewhat counterintuitively, the more sunspots there are on the surface of the sun, the brighter the sun is. Sunspot activity was unusually low in the period surrounding and including 1816—thirty-five sunspot groups were observed in 1816, compared with the normal one hundred, with 1816 falling about two-thirds of the way into the “Dalton Minimum,” a period of low solar activity that lasted from 1790 to 1830—and this lack of solar activity may have contributed to the cold and dark. And despite five sunspots appearing on June 10, 1816, six on June 12, and eight on June 16, all abnormally large and visible to the naked eye owing to the filtering effects of the excess particles in the atmosphere, sunspots didn’t reappear in greater numbers until September—too late to affect the 1816 harvest. As early as 1816, Scots Magazine began to draw some conclusions between sunspots and the price of wheat.

     Curiously, there is a concept in modern economics known as “sunspot equilibria.” The concept refers to the theoretical possibility that economic outcomes can be altered by a random, extrinsic variable (for example, a sunspot or animal spirits, per Keynes) that has nothing to do with economic fundamentals such as endowments, technology, or preferences. The possibility was first laid out in the context of a particular class of general equilibrium economic models in a classic paper by the economists David Cass and Karl Shell, “Do Sunspots Matter?” Of course, any effect of the low sunspot activity in 1816 wouldn’t qualify as a sunspot equilibrium since the low solar activity may have had real (intrinsic) effects on the climate and hence, crop harvests. In general, there isn’t much evidence for sunspot equilibria, although there is some evidence that sunshine has a small but statistically significant effect on stock returns.


Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.





Jim Narron is a senior vice president in the Federal Reserve Bank of San Francisco’s Cash Product Office.


Morgan_donald
Don Morgan
is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.


Posted by Blog Author at 07:00:00 AM in Crisis, Crisis Chronicles , Exports, Unemployment
Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.

About the Blog
Liberty Street Economics features insight and analysis from economists working at the intersection of research and policy. The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.


Economic Research Tracker

Liberty Street Economics is now available on the iPhone® and iPad® and can be customized by economic research topic or economist.


Useful Links
Comment Guidelines
We encourage your comments and queries on our posts and will publish them (below the post) subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted after COB on Friday will not be published until Monday morning.
Please be aware: Comments submitted shortly before or during the FOMC blackout may not be published until after the blackout.
Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. We reserve the right not to post any comment, and will not post comments that are abusive, harassing, obscene, or commercial in nature. No notice will be given regarding whether a submission will or will not be posted.‎
Disclosure Policy
The LSE editors ask authors submitting a post to the blog to confirm that they have no conflicts of interest as defined by the American Economic Association in its Disclosure Policy. If an author has sources of financial support or other interests that could be perceived as influencing the research presented in the post, we disclose that fact in a statement prepared by the author and appended to the author information at the end of the post. If the author has no such interests to disclose, no statement is provided. Note, however, that we do indicate in all cases if a data vendor or other party has a right to review a post.
Archives