Liquidity and Contagion: The Crisis of 1763
45 Pages Posted: 7 Oct 2004
Date Written: May 2004
The financial crisis that swept across northern Europe in 1763 bears a strong resemblance to more recent episodes of financial distress. The combination of the specific contractual arrangements at the time, interlocking credit relationships, and the high leverage of market participants triggered distress sales of assets, leading into a severe liquidity crisis. Hence, the crisis is an early instance of contagion on the asset side of the balance sheet. We highlight the salient features of the 1763 crisis and propose a stylized model of the events. Whilst the financial institutions have changed fundamentally in the intervening two hundred or so years, the underlying problems appear to be universal.
Keywords: Liquidity, contagion, financial crises
JEL Classification: G21, E44, N23
Suggested Citation: Suggested Citation