VoxEU Column COVID-19 Economic history

What we may learn from historical financial crises to understand and mitigate COVID-19 panic buying

Since mid-March 2020, countries have seen consumers panic buying large quantities of groceries in reaction to the COVID-19 pandemic. Why does panic buying arise and how may one mitigate its negative consequences? This column examines the Bank of England’s response to financial crises during the 19th century and suggests that a key action is to counter those incentives that turn panic buying into a rational strategy.

Governments across the globe have curtailed economic activity to ease the negative public health consequences of the coronavirus spread. The COVID-19 crisis visibly affects even grocery stores, one of the few open centres of economic activity that remain in many countries. Since mid-March 2020, panic buying (so-called Hamsterverkauf, or ‘hamster purchases,’ in German) has become a popularly-discussed phenomena, where in reaction to the pandemic, customers stockpile large quantities of certain groceries.1

From an economic point of view, this hoarding behaviour triggers inefficiencies and reduces welfare.2 Why does panic buying arise and how may one mitigate its negative consequences? In this column, I argue that financial crises during the 19th century may provide a starting point for answering these questions.

An attempt at an analogy: Central bank policy during historical financial crises

During the gold-standard era, central banks were often legally required to cover their note issuance with bullion. When a financial crisis shook a country, financial market participants would panic and try to exchange as many of their assets as possible at the central bank for banknotes: financial markets engaged in ‘liquidity hoarding’. These runs on banknotes followed a threefold rationale. 

First, financial market participants feared that their assets would lose value during the crisis. Second, money markets dried up during panics as financial institutions would stop lending to each other amidst a generalised loss of mutual confidence. Third, the abrupt increase in the amount of exchange requests during these runs was due to market participants’ fear of being left empty-handed. Those who observed others rushing in immediately joined the queue. Everyone feared that the central bank might stop providing liquidity at a later point in the crisis due to its reserve constraint. 

The runs reduced the ratio of gold reserves to banknotes so drastically that central banks were regularly on the verge of violating their legal minimum reserve. In the case of the Bank of England, the most powerful central bank throughout the 19th century, such a situation occurred during the crises of 1847, 1857, and 1866.

The Bank of England’s policy response

How did the Bank resolve these difficult situations? It initially tried several policy measures that were largely unsuccessful or had unintended consequences. At the beginning of such a panic, the central bank would engage in price rationing, by hiking the price for exchanging assets into cash. This price was the so-called discount rate. A higher discount rate raised the opportunity costs of abstaining from interbank lending (Bignon et al. 2012) and aimed at boosting gold imports to replenish the central bank’s reserve ratio.

Unfortunately, the success of this measure was usually limited because it triggered an adverse selection effect (Stiglitz and Weiss 1981). The more the interest rate was hiked, the higher became the probability that the central bank’s discount window would be frequented by dubious customers gambling for survival. In addition, market participants interpreted the dramatic rate increases as signals that the reserve situation of the Bank was indeed becoming dire. Instead of abating demand, the hikes seemed instead to intensify the runs (Hughes 1956).

Hence, in 1847, despite having hiked the discount rate to unprecedented levels, the Bank was rapidly approaching a breach of its minimum reserve requirement. When it saw no other way out, the Bank adopted quantity rationing alongside its price rationing strategy. As my co-authors and I show in an ongoing research project (Anson et al. 2020), the rapid decline in the reserve ratio led the Bank to systematically discriminate against certain financial market participants. Quantity rationing did not eliminate the supply constraint per se and it did not constitute a benign, let alone fair, policy. Most importantly, it did not guarantee that those who really needed liquidity effectively received it.

Eventually, the only truly successful policy response came during the autumn of 1847. When the financial panic reached previously unseen levels of severity, the British government gave the Bank temporary permission to breach its minimum reserve requirement. The mere publication of the declaration of suspension led to a sudden end of the runs. 

The panic of 1847 subsequently offered useful lessons for the crises of 1857 and 1866. During these later financial crises, the government announced the suspension of the reserve requirement almost immediately after financial market turmoil began and so the mounting pressure on the money market quickly abated (Hughes 1956, Flandreau and Ugolini 2013).

A moral of history?

Let’s fast-forward to spring 2020. In normal times, supermarkets do not have a fixed ex-ante supply constraint. The absence of an ex-ante constraint distinguishes supermarkets from central banks around 1850 with minimum reserve requirements. Yet, although systematic runs on products such as toilet paper do not occur in normal times, the COVID-19 crisis contributed to the emergence of a new supply constraint which was quickly seen as binding. 

Currently, many customers expect to suffer from such a constraint because they anticipate supermarket closures, shorter opening hours, and disruptions in supply and/or production chains. Others might stockpile because they have a strong preference to limit supermarket visits due to infection risk. Again others may be afraid of testing positively for COVID-19 and being quarantined sooner or later. Uncertainty about when the pandemic will subside and about governments’ reaction to the crisis are likely to compound these worries. 

In dynamics similar to those during historical financial crises, the supply constraint may also become a self-fulfilling prophecy: sometimes it is only because of panic buying that shortages of certain goods occur. In short, from the customers’ point of view, panic buying represents a rational strategy, just as it was a rational strategy for market participants in the 19th century to launch a run on banknotes during financial crises.3

Undermining the rational element of panic purchases

How can retailers and policymakers mitigate the negative externalities generated by panic buying? The historical example above suggests that one key priority is to counter those incentives that turn the run into a rational strategy. To the extent possible, food retailers may demonstrate that some or all of the expected supply and production bottlenecks are unlikely to materialise. By providing full transparency on current stocks and (future) flows, supermarkets could achieve an effect equivalent to the suspension of the Bank of England’s reserve requirement during the crises of 1847, 1857, and 1866; an effective way to undermine the rational element of panic buying is to make it blatantly unnecessary. Supermarkets should also emphasise how often, how systematically, and how diligently they implement disinfecting measures, dispelling rumours and unfounded fears through clarity and transparency.4

Similar to the Bank of England’s experience, it is technically possible – but not desirable nor effective – for supermarkets to engage in explicit price or quantity rationing strategies. An increase in supermarket prices may contribute to the emergence of peer-to-peer secondary markets, akin to the Bank of England’s attempt to revive the interbank market by hiking its discount rate. 

Price rationing, however, would be a disastrous decision according to economic, social, and fairness maxims during a recession with devastating unemployment records. Moreover, customers may interpret price rationing as a signal that supply and delivery chains are indeed disrupted and engage in even more hoarding. The analogy with the Bank of England’s price rationing efforts is tempting. 

Quantity rationing methods, in turn, do not solve the underlying problem since the (perceived) supply constraint would remain intact. Customers with a strong preference for hoarding purchases would simply go shopping several times a day or at different supermarkets.

Just like during historical financial crises, efforts to minimise the rational incentives underlying panic purchases may thus be the most effective and fairest measure that can be deployed. This dictum also applies to government intervention. The top priority in this regard is to maintain supply and production chains operative at all costs, while clearly communicating this endeavour to the public – in analogy with the British government’s decision to publicise the suspension of the Bank’s reserve rule. 

Concretely, securing the supply of food means keeping national borders as open and trade flows as stable as possible for supply and production chains to remain functional. National governments should avoid falling for a naive ‘ring-fencing’ mentality. States that restrict the movement of goods and people to the outside world beyond what is strictly necessary for containment purposes will likely sooner or later be affected by retaliatory rationing measures. 

Finally, in order to reduce consumers’ rational fears of temporary but complete closures of supermarkets, governments would have to credibly classify this type of measure as an absolute taboo during the current containment phase.

Solving commitment problems

From a microeconomic perspective, policymakers face a so-called commitment problem. National governments may promise today not to close borders but may be under strong political pressure to break this promise tomorrow. In Europe, an EU-wide agreement with effective sanctions for violating the rules of the game could possibly counteract these negative ex post incentives. An analogous solution to better protect against complete supermarket closures – which credibly binds the hands of the government – could perhaps be achieved by passing laws at constitutional rank. These laws could help pre-committing governments to an ex ante defined maximum scale for the containment measures. 

Eventually, the historical analogy above suggests that for the extraordinary but temporary measures to have their full effect, the credibility of a return to normality at the end of the crisis must never be doubted by the public. The Bank of England was able to conserve public confidence in its banknotes despite the de facto suspension of its reserve rule only because it rigorously returned to the legal ratio as soon as the panic dissipated.

Author’s note: Any views expressed in this column exclusively represent those of the author and do not reflect the official viewpoint of the Oesterreichische Nationalbank, the ECB or the Eurosystem. I am grateful to Maylis Avaro, Maria Stella Chiaruttini, Kara Dimitruk, Ernest Gnan and Stefano Ugolini for comments on the current and earlier versions of this column. All remaining errors are my own.


Anson, M, D Bholat, K Rieder and R Thomas (2020), “Mechanics and effects of central bank credit rationing: Quasi-experimental evidence from the Bank of England’s lending policies during the crisis of 1847”, unpublished working paper.

Bignon, V, M Flandreau and S Ugolini (2012), “Bagehot for beginners: The making of lender-of-last-resort operations in the mid-nineteenth century”, The Economic History Review 65(2): 580–608.

Diamond, D W, and P H Dybvig (1983), “Bank runs, deposit insurance, and liquidity”, Journal of Political Economy 91(3): 401–19.

Flandreau, M, and S Ugolini (2013), “Where it all began: Lending of last resort and Bank of England monitoring during the Overend-Gurney panic of 1866”, in M Bordo and W Roberds (eds.), Return to Jekyll Island: The origins, history, and future of the federal reserve system, Cambridge: Cambridge University Press.

Hughes, J (1956), “The commercial crisis of 1857”, Oxford Economic Papers 8(2): 194–222.

Stiglitz, J E, and A Weiss (1981), “Credit rationing in markets with imperfect information”, The American Economic Review 71(3): 393–410.

Wilson, B (2020), “Off our trolleys: What stockpiling in the coronavirus crisis reveals about us”, The Guardian (The long read), 3 April.


1 In a recent article in The Guardian, Bee Wilson (2020) suggested the term ‘resilience purchases’ may be more appropriate, not least because it is difficult to gauge the actual dimensions of ‘panic purchases’ empirically. Moreover, there is no clear definition regarding where to draw the line between ‘panic purchases’ and normal shopping behaviour.

2 In the case of products such as vegetables and fruit that are easily perishable, this is intuitive. If a household purchases an excessive supply of these products, the goods spoil and have to be disposed of (unless they can be frozen) – whereas another household, which is forced to leave the supermarket empty-handed, would have had desired to buy these products. In the case of non-perishable goods, such as the much-demanded toilet paper, the inefficiency stems from the fact that the many rolls purchased by one hamster shopper are effectively ‘lying idle’, while another customer with acute needs finds herself in front of empty shelves.

3 The paper by Diamond and Dybvig (1983) is the seminal reference in finance suggesting that ‘sunspot’ runs constitute sub-optimal coordination failures from a social perspective, while representing optimal, rational strategies from the point of view of the individual.

4 Additional technical fixes clearly go beyond the historical analogy. One fix may be to make face masks compulsory in grocery stores and to provide them at each supermarket entrance to limit contagion possibilities inside. Another targeted solution could be to organise systematic delivery options for quarantined people who tested positive for the virus.

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