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The Crisis of 1866

Author

Listed:
  • Marc Flandreau

    (Centre for Finance and Development - GRADUATE INSTITUTE OF INTERNATIONAL AND DEVELOPMENT STUDIES)

  • Stefano Ugolini

    (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - UT2J - Université Toulouse - Jean Jaurès - UT - Université de Toulouse - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)

Abstract

The collapse of Overend Gurney and the ensuing crisis of 1866 was a turning point in British financial history: this was the last time a serious disruption took place in the London money market until 2007-8. The achievement of relative stability was due to the Bank's willingness to offer generous assistance to the market in a crisis, combined with an elaborate system for discouraging moral hazard. The Bank's assistance was not anonymous because it monitored the names on its discounted bills. When Overend Gurney sought extraordinary assistance from the Bank, their request was refused on the grounds that the bills offered did not comply with standard eligibility rules. The Bank's refusal forced Overend to suspend payments and there was a general panic in the market. The Bank responded by lending freely and raising Bank rate to very high levels. The new policy was crucial in allowing for the establishment of sterling as an international currency. When in 1890 Baring Bros got into trouble, however, the Bank reacted differently and set up a bailout of the failing institution. Such such a contrasting attitude was dictated by the dissimilar position occupied by Overends (a bill broker) and Barings (an accepting house) within the London money market.

Suggested Citation

  • Marc Flandreau & Stefano Ugolini, 2014. "The Crisis of 1866," Post-Print hal-01293925, HAL.
    • Handle: RePEc:hal:journl:hal-01293925
    DOI: 10.1093/acprof:oso/9780199688661.003.0005
    Note: View the original document on HAL open archive server: https://univ-tlse2.hal.science/hal-01293925
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    References listed on IDEAS

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    Cited by:

    1. Laurence Alan Krause, 2019. "Walter Bagehot’s Lombard Street: An Interpretation," Review of Radical Political Economics, Union for Radical Political Economics, vol. 51(4), pages 572-580, December.
    2. del Río, Fernando & Lores, Francisco-Xavier, 2023. "Accounting for spanish economic development 1850–2019," Economic Modelling, Elsevier, vol. 121(C).
    3. Frederic S. Mishkin & Eugene N. White, 2014. "Unprecedented Actions: The Federal Reserve’s Response to the Global Financial Crisis in Historical Perspective," NBER Working Papers 20737, National Bureau of Economic Research, Inc.
    4. Calomiris, Charles W. & Flandreau, Marc & Laeven, Luc, 2016. "Political foundations of the lender of last resort: A global historical narrative," Journal of Financial Intermediation, Elsevier, vol. 28(C), pages 48-65.
    5. Mike Anson & David Bholat & Miao Kang & Ryland Thomas, 2017. "The Bank of England as Lender of Last Resort: New historical evidence from daily transactional data," Working Papers 0117, European Historical Economics Society (EHES).
    6. Clemens Jobst & Kilian Rieder, 2016. "Principles, circumstances and constraints: the Nationalbank as lender of last resort from 1816 to 1931," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 140-162.
    7. Stefano Ugolini, 2014. "Comment on: “Floating a “lifeboat”: The Banque de France and the crisis of 1889” by P.C. Hautcoeur, A. Riva, and E.N. White," Post-Print hal-01293759, HAL.
    8. del Río, Fernando & Lores, Francisco-Xavier, 2023. "Accounting for Spanish economic development 1850-2019," MPRA Paper 116025, University Library of Munich, Germany.

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    More about this item

    Keywords

    Financial crises; Lending of last resort; Financial stability; International currencies;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913

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