Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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.

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One response to “Lessons from Overend Gurney after 150 years

  1. Ardin Lalui March 26, 2011 at 3:14 am

    Good point. Just researching the history of Overend Gurney and came across your post. Thanks.

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