In the early years of the nineteenth century, British investors had enjoyed a period of reliable returns. To finance its war efforts on the Continent, the government had borrowed vast sums, with the national debt reaching 230% of GDP by the late 1810s. On this debt, investors could expect a ‘risk free’ return of around 5%.
The end of the Napoleonic Wars delivered a regime change in financial markets.
The City of London emerged as a safe haven for European capital, supplanting Amsterdam as the world’s most important financial centre.
Waterloo brought an end to the debt binge. With government borrowing retreating towards peacetime levels, the government no longer needed to pay the high rates of interest to encourage investors to lend.
In 1822, the Bank of England cut interest rates by 1%, the first reduction in over a century.