The Trafalgar Squeeze of Global Liquidity

Vincent Bignon, Benoit Mojon and Miguel Ortiz Serrano

No 21466, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The severity of financial crises is exacerbated by the lack of international liquidity or the absence of a global lender of last resort. This was evident during the Long Depression (1873–1896), the Great Depression (1929–1936), and, as we show in this paper, during the 1805–1806 crisis that followed the Battle of Trafalgar. The latter took Atlantic trade routes away from Spain and cut off Europe’s access to Latin American silver, the key high-powered money of the time. This silver shortage led the Banque de France to cut lending by nearly 50\% within three months, deliberately tightening credit to hoard specie and restore the value of its bank notes. In turn, no less than 20 Parisian banks failed, credit collapsed and European financial and money markets experienced acute stress, reflected in rising silver prices, pressure on the metallic reserves of other central banks such as the Banco de San Carlos in Madrid, and disruptions in bills of exchange markets across Europe, from Cádiz to Hamburg. The 1805–1806 crisis highlights how a safe asset's status requires both its resilient supply and the credibility of its issuer.

Date: 2026-05
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Working Paper: The Trafalgar squeeze of global liquidity (2026)
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