This paper examines the operation of the gold standard during the crisis of 1847. The crisis — commercial distress and financial panic — originated from a harvest failure rather than from monetary disorder. Following an outline of the events, we present a model of the financial sector which highlights the role of external and internal convertibility and is used to interpret the crisis. The 1847 crisis shows that international capital flow played a key role. It demonstrates that the gold standard was not characterized by automatic, non-discretionary adjustment. Faced with a confidence crisis and external gold drains, the Bank of England suspended Peel's Act and thereby was free to issue fiat money. It is argued that suspension of Peel's Act was the proper policy to restore confidence. The paper also sheds light on the role of a lender of last resort.
