Collapse of Overend, Gurney and Company and the Panic of 1866

Background. Overend, Gurney and Company was a London wholesale discount bank known as "the bankers' bank." Founded in 1800, it expanded its investment portfolio after Samuel Gurney's retirement, taking on long-term investments rather than holding necessary short-term cash reserves. To recover liquidity, the business incorporated as a limited company in July 1865, selling shares at a premium during a buoyant market created by the Companies Act 1862.

The Panic. The collapse of the institution triggered a banking panic that spread across London, Liverpool, Manchester, Norwich, Derby, and Bristol. Large crowds gathered around the head offices at 65 Lombard Street. The failure was the most significant casualty of the credit crisis, although dozens of other banks also failed. The panic decimated shipbuilding in London, causing the collapse of the Millwall Iron Works holding company.

Bank of England and Political Impact. Walter Bagehot noted the Bank of England's refusal to lend with Consol bonds as collateral was troubling. The need to maintain reserves mandated by the Bank Charter Act 1844 led to hesitation, while the suspension of requirements confused foreign investors. The economic impacts contributed to public agitation for political reform, leading to the Representation of the People Act 1867 and demonstrations such as the Hyde Park riot.

Legal Aftermath. Following the collapse, the directors of the company were tried at the Old Bailey for fraud. The charges were based on false statements made in the prospectus for the 1865 offering of shares. This legal proceeding addressed the specific financial irregularities that preceded the bank's failure and the subsequent panic.