Lessons from Overend Gurney after 150 years

In 1866, the then privately owned Bank of England allowed the largest discount house in the world, Overend and Gurney to fail. In its time, Overend and Gurney was clearly far more systemically important in world finance than Lehman was when it failed. It was not the Lehman of its day, not even the Goldman, but something bigger. It was second only to the Bank of England itself. Its discount business was probably equal to the other big three discount houses (Alexander, Bruce Buxton and Sanderson) put together (W. T. C. King, “The Extent of the London Discount Market in the Middle of the Nineteenth Century” Economica, New Series, Vol. 2, No. 7 (Aug., 1935), pp. 321-326). Milne and Wood (“Banking Crisis Solutions Old and New”, Federal Reserve Bank of St. Louis Review, September/October 2008, 90(5), pp. 517-30) give an even bigger estimate: “its annual turnover of bills of exchange was equal in value to about half the national debt, and its balance sheet was ten times the size of the next-largest bank.”

Its failure caused a panic which used to be described (until the current crisis) as the last true panic in London. In the long run, however, the financial system was hugely strengthened by the decision not to create moral hazard by bailing out the insolvent Overend and Gurney in 1866.

I would like to end with quotes from two well known Austrian economists. First from Israel Kirzner: “every mistake made in the market by one entrepreneur represents an opportunity for another.” Second from Ludwig Von Mises “Those fighting for free enterprise and free competition do not defend the interests of those rich today. They want a free hand left to unknown men who will be the entrepreneurs of tomorrow.” The regulatory mistake of the last decade or more has been defending the interests of those rich today; this is a mistake that continues today with all the bail outs that we are seeing.

Posted at 10:55 am IST on Tue, 7 Apr 2009         permanent link

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