Overend, Gurney & Co.

Overend, Gurney had been the most respected discount house in London — the Corner House, banker’s banker, second only to the Bank of England in the City’s estimation. That reputation was the problem. It let the firm fund itself with deposits withdrawable on demand while its partners, after the prudent founders passed on, moved the money into ventures that could not be liquidated at any speed: shipping lines, railways, an Irish plantation, a Welsh iron works.

By 1865 the firm was effectively insolvent, which it solved by incorporating and selling shares to a public that still trusted the name. The buyers acquired the losses along with the letterhead.

On Thursday 10 May 1866, Overend, Gurney suspended payments. The next day — Black Friday — the panic ran through the City, and the Bank of England lent £4 million in a single day against whatever collateral was offered, raising Bank Rate to 10% and holding it there for three months while it did so. Over two hundred firms failed anyway.

The episode’s importance is what it taught. Walter Bagehot, watching from the editor’s chair at The Economist, drew from it the doctrine that still governs central banking in a panic: lend freely, at a penalty rate, against good collateral. Note the shape of the failure — not a price crash but a funding run, money borrowed short against assets that could not be sold. It is the same failure that killed the shadow banks in 2008, rehearsed 142 years earlier.

What it cost

The panic reached the East End through Overend Gurney’s loan book. The Millwall Ironworks, a shipbuilder on the Isle of Dogs and a known client of the discount house, owed it £422,565 at the conversion to limited liability, against which the Bank of England’s account of the failure records no recoverable value at all. When the yards stopped, Poplar stopped. In January 1867 the local relief committee reported sixteen thousand people there destitute, and blamed it squarely on the stoppage of shipbuilding in the port of London.

• 16,000 people in Poplar totally destitute and without employment of any kind in January 1867, which the Poplar Working Men’s Committee for the Relief of the Unemployed attributed solely to the stoppage of shipbuilding in the port of London The Illustrated London News, The Distress in London, 26 January 1867
• 8,319 people the Poplar guardians relieved outside the workhouse in one week that January — 5,453 more than in the same week a year earlier; the union’s contractor delivered 9,324 loaves that week the Poplar board of guardians, reported in The Illustrated London News, 26 January 1867
• £25 a share the further call Overend Gurney’s shareholders had to meet after suing the partners over the prospectus and losing, on top of the £15 already paid on £50 shares Bank of England, The demise of Overend Gurney, Quarterly Bulletin 2016 Q2

Mr Jeffries was the relieving officer for Poplar’s south district. The guardians heard that January that so many people had applied that the relieving officers could no longer visit them all, and that Jeffries alone had nearly a thousand families on his books, each family representing at least five persons. He had been at work night and day and felt quite unequal to the strain. The day before, he had given away two tons five hundredweight of bread.

What followed

No government fell, and the Isle of Dogs did not get its shipyards back. The Survey of London dates the district that emerged from the distress of the late 1860s — solidly working-class, its employment coming mostly from the docks and wharves — to exactly this point. Overend Gurney’s shareholders lost in court and paid the call, which the Bank of England credits with cooling the appetite for limited-liability companies carrying uncalled capital. Bagehot published Lombard Street in 1873, arguing that a central bank must “lend freely, boldly, and so that the public will feel you mean to go on lending” — and recording his fear that 1866 was already being forgotten.

Bank of England, The demise of Overend Gurney, Quarterly Bulletin 2016 Q2, quoting Bagehot, Lombard Street, 1873; Survey of London, volumes 43 and 44, The Isle of Dogs: Introduction

Phases on show: boomdistresspanic