For bankers: the 1866 Financial Crisis

by Instant Noodle

1867 Bankers

Financial crises are nothing new. In 1866, a major bank called Gurney’s, hitherto considered “the banker’s bank”, went bust. This catapaulted what was a financial snafu to a financial crisis the size of which had never been seen before. It caused over 200 companies to go bust, including several major banks.

This forced a sea change in the way banking was carried out. Although the Bank of England had been acting as a lender of last resort for almost a century, it often did so with great reluctance and never publicly recognized the role as an obligation. This catastrophe twisted the arm of the Bank of England into taking up “a duty … of supporting the banking community”.

Contrast this decision of the Bank of England in 1866 to let Gurney’s collapse with the more recent Federal Reserve policy of nurturing investment banks under their wing. When the Fed brokered a bailout, it was not just a bailout of a systemically important bank; it was literally the bailout of a hedge fund. Surely when a hedge fund has grown so large it needs to be protected, alarm bells should have been ringing?

Needless to say, the calming effects of an endless sequence of government bailouts of the banking system left the Fed with the illusion that financial instability was no longer a problem that needed to be addressed. We were left with the illusion of stability, whilst the reality we were left with an environment where crisis was inevitable.

(Foreward to the 1867 Almanac)

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