Panic of 1866

[[File:Political cartoon from Fun magazine about Overend Gurney.jpg|thumb|Cartoon from ''Fun'' magazine, 1866. The caption reads 'The Old Lady of Threadneedle Street — "Now, my young friends, let this be a warning to you against rash speculation. What would you have done but for my little savings?"']]

The '''Panic of 1866''' was a nationwide financial downturn that accompanied the failure of Overend, Gurney and Company in London In the United Kingdom.

Only one in six of the joint-stock banks formed since 1844 survived this crisis.<ref>George Robb, ''White-Collar Crime in Modern England: Financial Fraud and Business Morality, 1845–1929'' (Cambridge: Cambridge Univ. Press, 1992), p. 71.</ref> The Companies Act 1862 had created a financial boom which laid the groundwork for the larger banks of British finance during the latter half of the 19th century. The Panic decimated shipbuilding in London, and the Millwall Iron Works holding company collapsed. <ref>Joshua Gooch, "On Black Friday, 11 May 1866", in ''BRANCH: Britain, Representation and Nineteenth-Century History'', ed. Dino Franco Felluga. Downloaded 23 Feb. 2016, p. 4.</ref>

==Impact on foreign trade== The primary importance of the expansion of credit was its role in foreign trade. Historians P. J. Cain and A. G. Hopkins note that "gentlemanly capitalism" (a class-conscious form of white-collar work in finance, insurance, shipping and the Empire) was the key to the growth of the Empire and its economic growth beginning in 1850.<ref>P. J. Cain and A. G. Hopkins, ''British Imperialism: Innovation and Expansion, 1688-1890'' (New York: Longman, 1993), p. 170.</ref> Historian David Kynaston notes the shift in the discount bills in the 1860s, particularly to finance supplies for the American Civil War,<ref>David Kynaston, ''The City of London, A World of Its Own, 1815–1890'' (London: Chatto, 1994), p. 225.</ref> and Richard Roberts describes the 1860s, 1870s and 1880s as the "internationalisation of the discount market".<ref>Richard Roberts, "The Bank of England and the City", in ''The Bank of England: Money, Power and Influence, 1694–1994'' (Oxford: Clarendon Press, 1995), p. 159.</ref>

According to a 2022 study, "countries exposed to bank failures in London immediately exported significantly less and did not recover their lost growth relative to unexposed places. Their market shares within each destination also remained significantly lower for four decades."<ref>{{Cite journal |last=Xu |first=Chenzi |date=2022 |title=Reshaping Global Trade: the Immediate and Long-Run Effects of Bank Failures |journal=Quarterly Journal of Economics |volume=137 |issue=4 |pages=2107–2161 |doi=10.1093/qje/qjac016|doi-access=free }}</ref>

==Bank of England== The Panic of 1866 was a key event in banking history. In the 12 May 1866 issue of ''The Economist'', Walter Bagehot noted that the Bank of England's refusal to lend with Consol bonds as collateral was troubling. The following week he also wrote that this refusal had caused further panic, as well as that the bankers did not consider the Bank of England to be a government agency.

By issuing its letter suspending the Bank Charter Act 1844,<ref>Suspension of the Bank Charter Act 1844 meant suspending the ratio of note issue in excess of 14 million pounds to gold, an action that typically had more effect on the perception of credit than on note availability.</ref> however, it revealed its backing by the Government and was "confirming the popular conviction that the Government is behind the Bank, and will help it when wanted".<ref>W. T. C. King, ''History of the London Discount Market'' (london: Frank Cass, 1935), p. 29.</ref>

On 12 May 1866, Bagehot wrote that the panic now meant "a state in which there is confidence in the Bank of England and in nothing but the Bank of England",<ref>Walter Bagehot, "What a Panic Is and How It Might Be Mitigated". ''The Economist'', vol. 24, No 1185 (12 May 1866), p.554.</ref> highlighting the conflict between the Bank's role in maintaining the liquidity of the domestic market and in maintaining its reserves to guarantee convertibility for foreign currency exchange.<ref>Gooch, op. cit., p. 5.</ref> In a panic, not only did the need to maintain reserves mandated by the Bank Charter Act 1844 lead to hesitation by the Bank, but also the suspension of its requirements confused foreign investors, who believed the Bank had suspended payments, which led to concurrent massive foreign withdrawals.<ref>Walter Bagehot, ''Lombard Street'' (London: Morgan, 1873), p. 25.</ref>

The Bank of England adopted Bagehot's solution, which was an explicit policy of free offers to lend at high discount rates. This policy rebuilt the Bank's reserves.<ref>Gooch, op. cit., p. 5.</ref> It also moderated and refined its use of monetary policy to influence capital flows in and out of the United Kingdom.<ref>{{Cite book |last=Read |first=Charles |title=Calming the storms : the carry trade, the banking school and British financial crises since 1825 |date=2022 |isbn=978-3-031-11914-9 |location=Cham, Switzerland |pages=204-206, 235-238 |oclc=1360456914}}</ref><ref>Bonamy Price. (1878) ''Chapters on Practical Political Economy.'' Kegan Paul. pp. 491-492.</ref>

The Bank of England's response to the 1866 financial crisis helped make the sterling pound an international currency.<ref>{{Citation |last1=Flandreau |first1=Marc |title=The Crisis of 1866 |date=2014 |url=https://oxford.universitypressscholarship.com/10.1093/acprof:oso/9780199688661.001.0001/acprof-9780199688661-chapter-5 |work=British Financial Crises since 1825 |place=Oxford |publisher=Oxford University Press |doi=10.1093/acprof:oso/9780199688661.003.0005 |isbn=978-0-19-968866-1 |last2=Ugolini |first2=Stefano}}</ref>

==Political impact== The economic impacts are held partially responsible for public agitation for political reform in the months leading up to the Representation of the People Act 1867. The crisis led to a sharp rise in unemployment to 8% and a subsequent fall in wages across the country. Similar to the "knife and fork" motives of Chartism in the late 1830s and 1840s, the financial pressure on the British working class led to rising support for greater representation of the people. Groups such as the Reform League saw rapid increases in membership and the organisation spearheaded multiple demonstrations against the political establishment such as the Hyde Park riot of 1866. Ultimately the popular pressure that arose from the banking crisis and the recession that followed can be held partly responsible for the enfranchisement of 1.1 million people as a result of Disraeli's reform bill.<ref name=Malcolm>Malcolm Pearce and Geoffrey Stewart, ''British Political History 1867–1990'', published 1992</ref>

==See also==

* List of banking crises {{Portal|Banks}}

==References== {{Reflist}}

==Further reading==

*Baxter, Robert. ''The Panic of 1866; with its Lessons on the Currency Act.'' London, Longmans, Green (1866); New York: B. Franklin (1969).

* Broadberry, Stephen, et al. "British business cycles, 1270–1870." ''Cliometrica'' 20.1 (2026): 37–68. [https://link.springer.com/content/pdf/10.1007/s11698-025-00306-w.pdf online]

*Elliott, Geoffrey. ''The Mystery of Overend and Gurney: Adventures in the Victorian Financial Underworld.'' London, Methuen (2006).

* Flandreau, Marc, and Stefano Ugolini. "Where it all began: lending of last resort and Bank of England monitoring during the Overend-Gurney panic of 1866." in ''The origins, history, and future of the Federal Reserve: a return to Jekyll Island''-- (2013): 113–161. [https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1847593 online]

*Kindleberger, Charles P. ''Historical Economics: Art or Science?'' University of California Press, 1990, p. 310. [http://content.cdlib.org/xtf/view?docId=ft287004zv&chunk.id=d0e8451&toc.id=d0e8451&brand=eschol online]

*{{cite book|last=Kynaston|first=David|author-link=David Kynaston|title=Till Time's Last Sand: A History of the Bank of England, 1694–2013|year=2017|publisher=Bloomsbury|place=New York|page=202|isbn=978-1408868560}}

* Odlyzko, Andrew. "Bagehot's Giant Bubble Failure." Available at SSRN 3445450 (2019). [https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=3445450 online]

* Read, Charles. "The Uncertainties of the 1860s and the Crisis of 1866." in ''Calming the Storms: The Carry Trade, the Banking School and British Financial Crises Since 1825'' (Cham: Springer International Publishing, 2023) pp. 199–245. {{ISBN|978-3-031-11914-9}}, {{OCLC|1360456914}}

* Schneider, Sabine. "The politics of last resort lending and the Overend & Gurney crisis of 1866." ''The Economic History Review'' 75.2 (2022): 579–600. [https://onlinelibrary.wiley.com/doi/pdf/10.1111/ehr.13113 online]

*Scott, Benjamin. ''A Statistical Vindication of the City of London; or, Fallacies Exploded and Figures Explained.'' London, Longmans, Green (1867); 3rd edition, 1877.

* Sowerbutts, Rhiannon, Marco Schneebalg, and Florence Hubert. "The demise of Overend Gurney." (2016). [https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=14238&context=ypfs-documents online]

* Xu, Chenzi. "Reshaping global trade: the immediate and long-run effects of bank failures." ''The Quarterly Journal of Economics'' 137.4 (2022): 2107–2161; focus on 1866 crisis. [https://academic.oup.com/qje/article-pdf/137/4/2107/51054093/qjac016.pdf online]

Category:19th century in economic history Category:Financial crises in the United Kingdom Category:1866 in economic history Category:1866 in London Category:1866 in the United States Category:Economic crises in the United States Category:Economic history of the United Kingdom Category:Benjamin Disraeli