Northern Rock: a day to remember

It was not an iceberg that caused the crash of Northern Rock and fortunately there was no loss of life; but it will be remembered, like the sinking of the Titanic, for years to come. None of us had seen queues of worried depositors outside bank branches before. We can remember it happening in It’s a Wonderful Life, but this was real life; and the pictures went round the world.

The affair must have damaged the Bank of England’s standing among other central banks. People say it is the first such event since Overend, Gurney in 1866. Although there have been numerous bank failures since then, none has involved queues of voters.

The bankruptcy of Overend, Gurney was momentous. Crowds gathered in Lombard Street clamouring to withdraw deposits, causing widespread panic and bankruptcies of other firms. But it was not a high street retail bank — Gurney & Co of Norfolk, which became part of Barclays, was a separate business, though there were family connections. Overend, Gurney was a large discount house with an international reputation, and its failure caused massive business disruption.

The firm had expanded very rapidly on the back of the growth of trade following the end of the American Civil War. But a growing proportion of its lending became careless and was bad. ‘A child who had lent money in the City of London would have lent it better,’ said Walter Bagehot. The failure led other banks immediately to stop lending to each other. The Bank of England, which had astutely foreseen the failure, was ready to provide liquidity to the market. This it did up to the limit of its own resources; and it then had to ask the Treasury for more. Gladstone, the chancellor, and Lord John Russell, the prime minister, agreed on the basis that they would get the necessary parliamentary approval as soon as possible ex post facto.