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).

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). 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. With the Bank policy of the 1830s, bankers began to leave their reserves with bill-brokers as “call loans”: discount firms accepted large deposits from banks that would be available for the banks at “call” while earning interest for the banks (King 48). Eager to increase their profitability, bankers deposited their reserves and brokers used this cash influx to speculate, repaying call loans as needed by cashing out short-term bills, selling relatively stable securities like Consols, and rediscounting bills with the Bank. By the 1850s, this arrangement had created a system of “excessive rediscounting, incautious granting of acceptance credits, and reckless creation of accommodation bills [foreign loans]” (King 182). The entire system depended upon functioning credit markets since any disruption would effectively eliminate Britain’s banking reserves: the reserves of the joint-stock banks engaged in these speculations were deposited at “call” while bill-brokers, ostensibly flush with valuable securities, “kept no reserve at all” (183). When financial turmoil in the US initiated a bullion drain, the Bank raised its discount rate and forced a constraint of credit, which led to another suspension of the Bank Act of 1844.[9] By cutting off rediscounting facilities to bill brokers, the Bank meant to quell a key source of speculative activity; however, the move instead merely created animosity between the Bank and the brokers. The years between 1858 and 1866 were, as King notes, “marked by a pronounced lack of co-operation between the Bank [of England] and the bill brokers” (215). Overend’s attempted run on the Bank and the Bank’s seemingly reciprocal decision to allow the firm to fail in the 1866 panic are the most overt examples of such “lack of co-operation.”

Yet for a decade with so little co-operation between institutions, the 1860s were also the decade when credit itself began to be seen as central to the British economy. The expansion of credit and the credit markets was seen as both a new and potentially progressive force, albeit one still constrained by a certain sense of “fitness.” Bagehot exemplifies this perspective, writing in The Economist on 26 May 1866 that the bank failures caused by the panic were due to extending credit to poor people: “Credit ought to be and can only be founded on an opulent and stable proprietary, on people who know they can pay calls, who are not driven into the market by every change in the value of their shares. A parcel of poor people is not a fit foundation to any bank” (614). Yet in Lombard Street, Bagehot qualifies this position, arguing that credit in Britain uniquely democratizes its trade and provides it with an evolutionary “‘propensity to variation,’ which, in the social as in the animal kingdom, is the principle of progress” (9). Bagehot’s use of this Darwinian phrase—which also plays a key role in his analysis of political organization in Physics and Politics—suits the financial world of the 1860s, which saw a rush to create new discount firms and joint-stock banks. Indeed, Lombard Street was written in response to the 1866 panic, with Bagehot arguing that the Bank of England should explicitly accept its position as the lender of last resort in the money market. To make his point, Bagehot argued that a new credit system had appeared in the years following the passage of Peel’s Act, and this system had made its impact on trade: “English trade is become essentially a trade on borrowed capital, and that it is only by this refinement of our banking system that we are able to do the sort of trade we do, or to get through the quantity of it” (13). Yet this shift did not mean an expansion of the discount market as it existed during the first half of the nineteenth century: the discount market had developed as a means of moving capital between country banks, which had large reserves due to the sales cycle of agricultural productions, and industry, which needed credit, through domestic bills. However, the mid-century expansion of the discount market was not an expansion of this domestic bill market. Indeed, after the panic, domestic banking increasingly focused on branch banking and the internal reorganization of bank assets, largely undercutting the need for a domestic bill market (King 273; Quinn 164). Another important aspect of the 1866 panic was this reorganization of domestic banking and the expansion of access to banks; even though the aftermath of the panic saw a bare 16% of companies weathering the tumult (Robb 71)—the Bank rate rose to 10% until July 1866—the financial boom of the early 1860s laid the groundwork for the larger banks that marked British finance through the latter half of the century.

The primary importance of credit’s expansion was its role in foreign trade. Bagehot’s phrase “English trade” clearly encompasses, if not primarily means, English foreign trade. Historians P.J. Cain and A.G. Hopkins note that the British economy after 1850 was not, as generally believed, dominated by industrial production but rather by the service sector (113); Cain and Hopkins offer a persuasive argument for “gentlemanly capitalism”—a class-conscious form of white-collar work in finance, insurance, shipping, and imperial policy—as the key to British imperial and economic growth (170). We can trace this shift through the arrival of foreign banking and the shift in the discount market toward international bills in the 1860s, due in part to the US Civil War (Kynaston 226) and to European conflicts. Domestic bill circulation began to decline in 1857 (King 271) as investment in foreign securities became increasingly important, most especially in foreign government loans (King 267), and in the joint-stock banks created to facilitate them (Kynaston 225). Economic historian Stephen Quinn notes a fivefold increase in foreign securities investment during the period from 1855-1870 (173), and Richard Roberts describes the decades of the 1860s, ‘70s, and ‘80s as “the internationalization of the discount market” (159). For this reason, foreign banks began to open London branches in 1870;[10] Quinn notes “by 1877, foreign bank deposits were £107 million or one-fifth the size of all deposits in British commercial banks, and London was even being used to finance trade that never passed through Britain” (148).

Yet, as Bagehot noted, the internationalization of Britain’s discount market made the Bank of England the unspoken guarantor for the system’s liquidity. The 1866 panic provides a key event in the recognition of this shift. Although a letter suspending Peel’s Act was signed 11 May 1866, the Bank had not quelled the panic by the time The Economist had gone to press for its 12 May edition. There, Bagehot wondered whether Peel’s Act would be suspended, noting that the Bank had refused to discount government securities, which made it likely that either it had or would suspend the act (CF. “The State of the City” 554). Bagehot found the Bank’s decision to lend on merchant bills but not consols troubling, and he wrote the following week that it had caused further panic: “The mere statement of a doubt . . . caused an uneasy feeling both in London and at a distance, and led all persons who had consols to see if they could have advances on them, and if they could, to take them while they were going” (“The Panic” 583). The Bank threw country banks into a panic by refusing to lend on government securities, which, by extension, placed its very relation to the government in question. Indeed, Bagehot notes in Lombard Street that although the Bank did not think of itself as a government agency, the suspension of the act revealed its implicit government backing, in effect “[confirming] the popular conviction that the Government is close behind the Bank, and will help it when wanted” (29). Even if the Bank, backers of Peel’s Act, and classical political economy did not share in this popular conviction, the expanded credit system demanded a new approach, and what Bagehot outlines offers the basic ideological paradox of laissez faire economics when it confronts credit: “The best thing undeniable that a Government can do with the Money Market is to let it take care of itself. But a Government can only carry out this principle universally if it observe one condition: it must keep its own money” (Lombard Street 68). That is to say, the Government—via the Bank—is responsible for creating and protecting its money, and consequently, the markets by which that money moves. In terms of central bank policy, Bagehot’s argument in both Lombard Street and The Economist highlights the decade’s shift toward foreign investment and marks a significant shift in the Bank’s role in domestic and foreign circulation from the Currency and Banking schools that appeared around the 1844 Bank Act.[11] For Bagehot, these arguments were beside the point: against the Currency school, the Bank’s current role in the new credit markets showed that, no matter the legal strictures placed on note issue, the Bank was not a neutral monetary conduit; yet against the Banking school, the development of the discount market revealed that credit markets did not take care of excess note issue or themselves. The role of the Bank of England must now be understood quite differently. On 12 May 1866, he wrote that panic now meant “a state in which there is confidence in the Bank of England and in nothing but the Bank of England” (“What a Panic Is” 554). Why? Because “the wholesale currency of the country is a ledger currency—a currency of bankers’ deposits transferred by bankers’ cheques” (“What a Panic Is” 554). In a panic, the breakdown of this national system highlights an underlying conflict between the Bank’s role in maintaining the domestic market’s liquidity and in maintaining a reserve to guarantee convertibility for foreign exchanges. In a panic, not only did the need to maintain its mandated reserves lead to the Bank’s hesitancy to act but the suspension of the act confused foreign investors, who believed the Bank had suspended payments, which led to a spate of foreign withdrawals (Lombard Street 25). Bagehot’s solution, an explicit policy of free lending at high discount rates to build reserves, became the Bank’s policy through the century’s end.

It is by no means a coincidence that this economic theory of active intervention to encourage natural market processes occurred alongside the deregulation of limited liability joint stock companies—such entities are themselves government creations—but it is also useful to note the contemporaneous emergence of evolutionary and biological emphases in social and economic theory. By 1866, seven years after the publication of Origin of Species, the discursive intersection of political economy and evolution had begun to crystallize into nineteenth-century discourses of bio-power that are effectively premised in finance, credit, and various collectivities. We can see these discourses as Bagehot extends the kinds of analyses made by Herbert Spencer by combining evolution, social theory, and economics in Physics and Politics, which began serial publication in The Fortnightly Review during 1867. Bagehot here argues that evolution preferentially selects nations as “co-operative groups” (584); the construction of habit helps societies maintain such useful groupings, though continued evolution can occur only when societies also allow variation. In effect, Bagehot’s position defends the progressiveness of the British Empire: arrested civilizations—e.g. “Oriental nations” and “savages” (465)—eliminate variation by rigorously imposing customs and forcing adherence to public opinion, while western civilizations have a racial predispositions toward variation, from an early willingness to introduce genetic variation while retaining unified customs to a later willingness to introduce variations of ideas through discussion, trade, and commerce. It is precisely this variation that Bagehot claims in Lombard Street that credit introduces into British trade.

Engraving of William Stanley Jevons

This sense of impersonal biological forces working in the national aggregate reflects the expanded international credit markets and the declining—yet still important—sense of names in finance. The same shift also marks political economy, which had taken up biological discourses in the 1850s in works such as Richard Jennings’s 1855 Natural Elements of Political Economy.[12] In June 1866, William Stanley Jevons outlined what would become marginal utility theory with the publication of “A Brief Account of a General Mathematical Theory of Political Economy” (elaborated in his 1871 The Theory of Political Economy).[13] Jevons begins with a Benthamite emphasis on pain and pleasure, with an understanding that these are produced by consumption. Jevons’s theory puts forward a potential mathematical formalization of this pleasure/pain calculus by shifting immediately from the individual to the aggregate: since “every appetite or sense is more or less rapidly satiated,” Jevons argues, eventually “a certain quantity of an object received, a further quantity is indifferent to us, or may even excite disgust” (283). For an individual, a desired object is a utility, yet the individual’s pleasure changes as he or she consumes it; Jevons traces the variations in utility, its mathematical “coefficient,” as “some generally diminishing function of the whole quantity of the object consumed” (283). Jevons notes that utility is specific for each individual—“the function of utility is peculiar to each kind of object, and more or less to each individual” (283)—yet the utilities Jevons means to trace “can only be detected in aggregates and by the method of averages” (285). In this essay, Jevons believes such aggregation to be beyond his reach, writing: “of course such equations as are here spoken of are merely theoretical” (285). Yet in the Theory of Political Economy, Jevons links his equations to prices, e.g. corn prices (156-60). Moreover, such aggregative utilities displace abstract labor from its central role of creating value in political economy; Jevons notes that, pace Ricardo, his approach highlights workers’ various capacities and, moreover, that interest does not depend upon the value produced by labor. In Theory of Political Economy, Jevons will effectively sever the connection between labor-value, stating “labour once spent has no influence on the future value of any article” (164).

What makes Jevons’s essay, and further work, so interesting is the displacement of political economy’s conjunction of life-labor-value into a new set of discourses, not only those of abstract mathematical theorems and biology, but also of statistics. In The Coal Question: an Inquiry concerning the Progress of the Nation and the Probable Exhaustion of our Coal Mines (1865), Jevons describes the limits of coal production by comparing the Malthusian formula for population increase to coal’s continually increasing number of uses (cf. 149-153). By contrast, his 1863 pamphlet, A Serious Fall in the Value of Gold Ascertained, used statistical analysis to effectively trace secular price trends and non-seasonal business cycles. Seen in light of the 1866 panic, Jevons’s intellectual conjunction of abstract mathematics, Malthus, and statistical analysis seems of a piece with the expansion of impersonal credit markets. Even so, an example from the 1871 Theory shows that even Jevons’s attention to statistics led him to privilege an impersonal set of rational biological forces not seen in the 1866 panic: using the prices of consols as an example, Jevons argues that prices are determined “not by the enormous amounts which might be bought or sold at extreme prices, but by the comparatively insignificant amounts which are being sold or bought at the existing prices” (110). Of course, as Bagehot described, consols couldn’t be sold or discounted at any price on 11 May 1866. Jevons later tried to match crises to solar periods and sunspots—including the 1866 panic—noting the confluence between crises, high grain prices, and the sun-spot period of 11.11 years (Investigations in Currency and Finance 203). In his essay on Jevons, Keynes helpfully reframes this argument as soliciting questions about the effects of harvests on investment decisions; by contrast, Mary Poovey argues that Jevons’s theory demonstrates a desire to find natural causes to economic issues in order to maintain economics’ view of itself as a science (283). Whether viewed economically or symptomatically, Jevons’s discursive choices in his 1860s work reveal more about the 1866 panic than his theory of business cycles.

Although Marx’s Capital bears little resemblance to Jevons’s work—after all, Marx maintains a Ricardian emphasis on labor and focuses on structural demands over the Crusoe-style individualism seen even in Jevons—Marx composed volume one through the 1866 panic, and his exposition similarly relies on impersonal exchange alongside physiological metaphors.[14] For Marx, labor itself is a biological mediator, “the universal condition for the metabolic interaction between man and nature” (290). When this universal biological condition confronts commodity exchange, however, it reveals the dual nature of capitalist production: by moving beyond individual exchanges, commodity exchange “develops the metabolic process of human labor,” i.e. extends the social division of labor, while simultaneously developing “a whole network of social connections of natural origin, entirely beyond the control of the human agents” (207). The insertion of machinery into the social division of labor does not simply disrupt a human metabolism—after all, mercantile production is also capitalist production—but rather remakes the human: on the one hand, maiming, deforming, and degrading; on the other, reorganizing social bonds and offering the potential of more free time. Yet perhaps the most striking effect of the expansion of the credit markets in Marx’s exposition is that he effectively frames commodity production as premised upon credit. This is most obvious in his claim that money becomes a means of payment for existing debts under commodity production (cf. 233).  However, Marx’s initial exposition of exchange- and use-value is itself premised on an incipient notion of credit that draws on the atmosphere of the 1860s financial world: for Marx, exchange-value is at once innately different from, yet attached to, the use-value of commodities. Their doubled circulation—as commodity and as credit—form the basic antagonism of capitalism. By examining the panic, we can see how such notions of credit suffused the atmosphere of 1860s London.

In terms of cultural production, we can see the effects of the panic on literature in both content and form. The continued misadventures of Albert Gottheim, aka Baron Grant, served as the model for Augustus Melmotte in Anthony Trollope’s The Way We Live Now (cf. Kynaston 264-75); Gottheimer had been involved in the locked-up investments that led to Overend’s downfall, as well as the earlier Leather Crisis of 1862, but he went on to achieve greater prominence as an unprincipled speculator in the 1870s. Indeed, the panic crystallizes the sense of greed and speculation that fuelled pre-panic novels such as Charles Dickens’s Our Mutual Friend and even George Eliot’s work, from the fairy tale reflections on greed in Silas Marner and Brother Jacob to the emphasis on social connection and bankruptcy in Middlemarch and Daniel Deronda.[15] Taken alongside the Second Reform Act, we also see an expansion of narratorial perspectives in the multiple narrators of works like Browning’s The Ring and the Book and Collins’s The Moonstone, both published in 1868. In The Moonstone, Gabriel Betteredge seems to evoke the Overend’s trial in his description of Rosanna Spearman’s prior criminal record: she “had been a thief, and not being of the sort that get up Companies in the City, and rob from thousands, instead of only robbing from one, the law laid hold of her, and the prison and the reformatory followed the lead of the law” (34). One may also see this milieu’s influence in the many financial (not to mention evolutionary) references of Samuel Butler’s Erewhon and The Way of All Flesh, both partially written during the 1860s.

In conclusion, the 1866 panic offers a unique point of entrance for considering the 1860s and the direction of the British Empire and its finances through the end of the century, both for the financial and economic discourses it unearths, as well as the pettiness, greed, and uneasiness it reveals and calls forth from cultural production.