In 1866, the largest discount house in London, Overend-Gurney, teetered on the verge of insolvency as a result of extensive loan losses. It appealed to the Bank of England, then a privately held joint-stock bank with a monopoly over note issuance, but the Bank refused to help Overend-Gurney on the grounds that it was insolvent. When Overend-Gurney suspended payments, a massive bank run spread throughout London, with observers remarking that an “earthquake” had torn through the City. Panicked bankers flooded to the Bank of England’s discount window, where the Bank fulfilled any “legitimate request for assistance.” Fulfillment came in two forms: discounts, which were outright purchases of bills, and advances, which were akin to modern-day repurchase agreements using debt securities. In the first week of the Panic of 1866, the Bank lent about 10 million British pounds sterling, more than doubling its noncrisis level of discounts and advances. Although the Bank lent freely and widely during the Panic of 1866, scholars believe the suspension of the Bank Charter Act of 1844 finally calmed the bank run. This move allowed the Bank to issue notes beyond the limit set by the Act of 1844, but the Bank never used this ability as the suspension announcement immediately calmed the market. This action highlighted the Bank’s implicit government backing and role as the lender of last resort during financial crises.
Sean Fulmer (Mon,) studied this question.