Overend Gurney was the bankers' bank — it lent £11M to ventures it did not understand

Overend, Gurney and Co. was London's largest discount house — the institution through which other banks and merchants discounted their bills of exchange. It was, in effect, the bankers' bank: the place where the City's surplus liquidity was parked overnight. Its name on a bill was as good as the Bank of England's.

In the 1860s, the firm's partners began deploying this trusted position to make direct investments — in iron works, shipping ventures and speculative industrial companies. These were long-term, illiquid bets funded by short-term deposits that could be withdrawn on demand. The mismatch was invisible while confidence held.

In 1865, the partners converted the firm to a limited company, partly to raise fresh capital. The conversion forced a public accounting that revealed the bad debts. Confidence eroded. On 10 May 1866 — Black Friday — Overend Gurney failed with liabilities of approximately £11 million. The failure triggered a panic across the City; solvent firms could not obtain credit.

The Bank of England, after initial hesitation, lent freely against good collateral at a penalty rate. Walter Bagehot, editor of The Economist, codified the response in 'Lombard Street' (1873): in a panic, the central bank must lend freely, against good security, at a high rate. The rule became the foundation of modern lender-of-last-resort doctrine.