Joshua Gooch, On Black Friday, 11 May 1866... http://www.branchcollective.org/?ps_articles=joshua-gooch-on-black-friday-11-may-1866 Joshua Gooch, “On ‘Black Friday,’ 11 May 1866” The 1866 panic began with the collapse of the City of London’s oldest bill-brokerage firm and discount company, Overend, Gurney, and Company. Although the 1866 panic did not have the far-reaching economic impact of the 1857 or 1873 crises, as an event it offers a useful vantage point to survey changes in British finance, economics, and politics, and the cultural perception of those changes. Historically, this panic was the first to follow the 1862 passage of the Companies Act,[1] and it exemplifies the expansion of the London credit markets in the 1860s. In terms of law, subsequent suits brought by shareholders clarified the responsibilities of creditors, shareholders, and board members in the new era of limited liability.[2] In terms of banking, the panic marked the effective emergence of a central bank policy from the 1870s forward of free lending at high rates, which Walter Bagehot championed in the panic’s aftermath. In terms of political importance, the panic occurred simultaneously with Parliamentary debates on the Second Reform—articles on both appeared side-by-side in May 1866 issues of The Economist—and the economic turmoil wrought helped push reform. The year 1866 also marks the emergence of two major interventions in political economy, albeit at the time unremarked. In June 1866, William Stanley Jevons published his first paper on marginal utility theory,[3] and from January 1866 to March 1867, Karl Marx composed the first volume of Das Kapital in London (Mehring 357). Although it would be a mistake to consider the work of Jevons or Marx as a commentary on the panic itself, their shifts in emphases toward impersonal individualism and class, respectively, highlight broader changes in the economic environment that can be captured by reflecting on the 1866 panic. The 1866 panic crystallizes the political economic history of the period alongside a clear shift in economic thought toward statistical, impersonal, and biological descriptions of economic processes. In effect, human social and economic life begins to emerge as something produced yet potentially beyond conscious control. The emergence of multi-perspectival character narration in literature during this period in texts like Robert Browning’s The Ring and the Book and Wilkie Collins’s The Moonstone, both published in 1868, points to the importance of the environment that led to the 1866 panic.[4] The best synopsis of Overend’s and its milieu is W.T.C. King’s account of the London money market, referred to by all subsequent historians of the period, and I will refer to King throughout while also turning to other historians, historical sources, and contemporary observers. Begun in 1802, the firm helped pioneer the mechanics of bill-discounting through a series of negotiations over the limits of the usury laws between their de facto London agent, Thomas Richardson, and John and Henry Gurney’s Norwich and Norfolk Bank.[5] In effect, Richardson and the Gurneys, who began as Quaker wool merchants, created a broker system that skirted the limit of early nineteenth-century usury law; their agents brokered bills but, by charging commission only to bill sellers, did not act as an interested party or banker (King 22). Over the next fifty years, the firm, King writes, was “renowned almost as much for the scrupulous honesty and straightforwardness of its dealings as for their extent and importance” (26). page 1 / 14 Joshua Gooch, On Black Friday, 11 May 1866... http://www.branchcollective.org/?ps_articles=joshua-gooch-on-black-friday-11-may-1866 Portrait of Walter Bagehot Sixty years later, however, the firm’s good reputation was central to the panic caused by its collapse. Walter Bagehot wrote in the 12 May 1866 edition of The Economist: “it has been signally shown how much an old name, which all really instructed people knew to have lost its virtue, still retains its magical potency over the multitude” (“The State of the City” 553). The failure of an old and established firm was shocking: through the mid-nineteenth century, British finance was in many respects as much a community as an industry, and one predicated on a small set of families with credit-worthy names. Observers found the failure of this credit-worthy name shocking, though less so given the firm’s many rumored problems. By 1866, Overend’s had become a very different firm. In the late 1850s, a new generation of firm management began speculating in areas outside discounting, including investments in ironworks and a large number of shipping companies. Court records show their expected losses on these investments at approximately 4 million.[6] In an attempt to recoup their losses and reorganize the firm, the board tried and failed to sell out in May 1865 to the National Discount Company, a joint-stock discount house formed in 1856. The board then decided to reorganize the firm as its own limited liability joint-stock company under the new Companies Act, issuing a prospectus on 13 July 1865. The initial offering did well, but between raised discount rates in October[7] and the failures of the Joint Discount Company and of a railway firm with a similar name (Watson, Overend & Co.), the firm began to see both public withdrawals and the sale of shares by its old management (King 242). In May 1866, the firm’s share-prices declined further, and the Bank again increased its rate, which left Overend’s short of cash. The firm turned to the Bank of England for discount facilities, which the Bank turned over to a three-man committee for review and, finally, dismissal. Unable to find enough credit to continue daily operations, the firm smashed. Historian David Kynaston sees the Bank’s refusal as symptomatic, noting that the Bank’s decision to allow the failure of a firm that “had once been very much members of the club” was not “a strictly financial decision” (239). page 2 / 14 Joshua Gooch, On Black Friday, 11 May 1866... http://www.branchcollective.org/?ps_articles=joshua-gooch-on-black-friday-11-may-1866 Indeed, Overend’s had long been known as the Corner House, which not only indicated its physical location on the corner of Birchin Lane and Lombard Street, but also its central position in the discount market. Yet in the decade after Samuel Gurney’s death in 1856, Overend’s had breached the informal rules of nineteenth-century gentlemanly capitalism. While “new money” was a continuing social concern throughout the century, we can locate an explosion of such new money in the expansion of discount houses and joint stock banks between 1856 and 1866. King notes that the Companies Act and the growth of bill dealing created an environment for the extensive expansion of discount companies during this period (217). Although joint stock companies had been used for large-scale projects, most especially in infrastructure, the 1860s saw a blossoming not in industry but finance: 108 banks and finance companies incorporated between 1862 and 1866 (Robb 69). Discount companies appeared in waves in 1856, 1862, and 1863: King notes 40 new banks and discount firms in 1862 (230), and Kynaston notes that 700 new companies were created in the speculative frenzy of 1863 (220). In its new public incarnation, Overend’s neatly displayed the intersection of an older form of finance reliant on established names and a newer form of speculative investment and limited liability, which brought the firm formally in line with its new joint-stock competitors. This formal shift matched the changed attitude of the firm’s new leadership (cf. King 246-47), which had antagonized the Bank of England in 1860 when, on 11 April, Overend’s tried to lead a run on the Bank by withdrawing £1.65 million in £1000 notes, depleting the Bank’s reserves (King 213). While a spate of embezzlements in the 1860s garnered attention in the press, this organized action by a single firm is perhaps more largely indicative of an increasingly competitive environment that was less reliant upon, or interested in, operating through personal connections, and thus further removed from personal scruples. In terms of Overend’s, historians often attribute this change in attitudes to the lessened impact of Quaker scruples on the second generation of Overend’s management, a point made by both King and Kynaston, but this shift in attitudes marks finance in the latter half of the nineteenth century. According to Kynaston, Overend’s attempted run was likely only stopped “by the imminence of a parliamentary question to be asked on the subject of the sharp drop in the Bank’s reserve” (201). In effect, Overend’s tried, unsuccessfully, to blackmail the Bank into reversing its March 1858 decision to refuse lucrative discounting facilities to bill-brokers. Since 1830, the Bank had offered discount facilities to bill-brokers. This policy, King argues, “was ultimately to revolutionize the [discount] market structure” (64): brokers began to accept deposits from London bankers, invest them in bills and other securities, and rediscount at the Bank as bankers called for their deposits.[8] Overend, Gurney, & Co. had largely benefited from this policy; as King notes, “at the outset, Gurney’s was probably the only house which was trusted in this way” (64). Already overextended in bad investments by 1860, the firm likely needed access to the Bank’s discount window. The reasoning behind the Bank’s policy change, however, offers insight into the speculative activity bill-brokers had become used to during the 1850s, and which set the stage for the expansion of the discount market in the 1860s.