One of the most dramatic events in the financial history of Victorian England was the collapse of Overend, Gurney and Co. Its failure had a more severe impact on the London financial market than the collapse of Bear Stearns had on U.S. markets over 140 years later. During the financial crisis of 1866, over 200 firms went bankrupt, including a number of banks. The failure of Overend, Gurney and Co. also led to one of the first trials for financial fraud in history when all six directors were brought before the courts of London to answer for their alleged crimes.
Quaker Origins
When Limited Liability Adds Insult to Injury
Overend, Gurney & Co. stock started trading on August 21, 1865, and hit a high of 22.5 on November 16, 1865. As the price rose, investors who had missed out on the initial offering bought shares, keeping the price around 20; however, they were unaware of the rot that lay beneath the façade of the bank. By the end of February, 1866, shares still traded above 20, but began to drift down, falling below 15 by late April. In April, the investment in the Millwall Iron Works on the Isle of Dogs began unravelling, producing £500,000 in unexpected losses for the bank. The financial markets in London were reaching the heights of a small bubble, and the Bank of England responded by raising the lending rate from 6 per cent to 7 per cent on May 3, to 8 percent on May 5 and to 9 per cent on May 11 and 10 percent on May 12. As money tightened, Overend tried to raise capital by collecting on debts owed to it by the Mid Wales Railway and others, but when the bank was unable to get this money, it became evident that the bank would soon become insolvent. Overend’s only alternative was to go to the Bank of England, which as lender of last resort, could have bailed out Overend, Gurney and Co. However, the Bank of England declined, not because allowing Overend to fail would reduce the amount of competition the Bank of England had, but because Overend was in such poor shape that no amount of money could have saved it. On May 10, 1865, the bank announced that it was suspending payment on deposits. The price of the stock had closed at 10 on May 10, fell to 3.5 on May 11 and to 0.5 on May 12. Until then, few had suspected that the greatest name in wholesale banking could have collapsed so suddenly. If Overend, Gurney & Co. was unsafe, could any bank be safe? A financial panic ensued and during the next few months, over 200 companies, including many banks, failed as well.
For the shareholders, the worst was yet to come. The bank had issued shares at a par of £50, only requiring £15 of paid in capital before going public. Since the bank still had many outstanding liabilities, the shareholders were liable for these, though only to the extent of the par value of the shares. Still, this meant that not only had shareholders lost all they had invested in Overend, Gurney & Co., but now they would be required to pay an additional £35 to a bankrupt company to help cover outstanding liabilities.
Although some shareholders made legal challenges to this demand, the courts said a contract was a contract and shareholders had to pay the additional £35 (equivalent to about $7500 in today’s money) even though they would never get anything back. Can you imagine how shareholders in Bear Stearns would have reacted if, after losing everything, they had been required to send in an additional $7500 for each share they owned even though the company was already bankrupt?
The End of Overend
The failure of Overend, Gurney and Co. inspired writers for years to come. Anthony Trollope used one of the swindlers involved in the collapse for his novel, The Way We Live Now, Bagehot frequently referred to the Overend fiasco in his book Lombard Street, and Karl Marx used the Overend collapse as a symbol of all that was wrong with capitalism. Just as no one from Wall Street went to jail as a result of the collapse of Bear Stearns, other companies, and the billions of dollars in losses that occurred during the 2008 financial meltdown, no one from Overend, Gurney and Co. was convicted of any crimes. In fact, the Norwich Gurney bank continued to operate even after shareholders had been fleeced of their money since the bank had been legally separated from Overend, Gurney and Co. when it became a limited liability company. As the French say, plus ça change, plus c’est la même chose. The more things change, the more they stay the same. Today, banks may pay billions in fines to the government for their misdeeds, but no banker goes to jail. If only criminals worked for billion-dollar corporations, we wouldn’t have to build any prisons.
The government of Zimbabwe announced this week that they were finally demonetizing the Zimbabwe Dollar. Although the United States Dollar replaced the Zimbabwe Dollar in every day transactions back in 2009, banks still carried accounts that were denominated in Zimbabwe Dollars. Beginning on June 15, 2015, for only 35 quadrillion (35,000,000,000,000,000) Zimbabwe Dollars bank customers will receive one free portrait of George Washington. This opportunity expires in September.
Believe it or not, Zimbabwe will not get in the Guinness Book of World Records for the most insane currency conversion. Hungary holds this dubious record because 400,000 quadrillion pengo were required to obtain one forint back in 1946 when Hungary went through its own currency conversion.
The Zimbabwe Dollar Is Born
Zimbabwe was originally a British colony known as Rhodesia, named after Cecil Rhodes who obtained a mining concession from a local king. The colony of Rhodesia declared its independence on November 11, 1965, but because it did not allow blacks any representation in the government, Britain imposed sanctions against Rhodesia. On March 3, 1978, Ian Smith signed an agreement to provide black majority rule in Rhodesia. The country was renamed Zimbabwe Rhodesia on June 1, 1979, and Zimbabwe declared its independence on April 17, 1980. The country’s currency was originally the Rhodesia Pound which was introduced at par with the British Pound Sterling. The Rhodesia Dollar (RHD) replaced the Rhodesia Pound on February 17, 1970 with 2 Rhodesia Dollars equal to 1 Rhodesia Pound. The Zimbabwe Dollar in turn replaced the Rhodesia Dollar at par on April 18, 1980. When this conversion occurred, a Zimbabwe Dollar was valued at 1.47 United States Dollars, but because Zimbabwe had higher inflation than the United States, the Zimbabwe Dollar steadily depreciated against the U.S. Dollar.Inflation Explodes
The combination of decreases in farm production following large land redistributions, a decline in the production of goods, a collapse of the banking system, involvement in the Second Congo War in 1998, and a drought in 1999, led to a steady decline in production. Zimbabwe suspended foreign debt repayments in February 2004, resulting in compulsory suspension from the IMF. This combined with sanctions imposed by the United States, the IMF and the European Union led to large budget deficits which could only be covered by printing money, eventually leading to hyperinflation. The inflation rate in Zimbabwe averaged around 10% in the 1980s, around 20% to 30% between 1990 and 1997, and 50% between 1998 and 2000. In 2001, the inflation rate exceeded 100%, and in 2003 it was almost 600%. At that point, hyperinflation kicked in. Inflation rose to 1281% in 2006, and 66,000% in 2007. In 2008, the money supply grew by 658 billion percent and inflation hit an annualized 80 billion trillion percent (89,700,000,000,000,000,000,000) toward the end of 2008. At that point, Zimbabwe Dollars were about as valuable as toilet paper.Hyperinflation Makes Life Miserable
The main cause of Zimbabwe’s inflation was the excessive money growth of the Zimbabwe Dollar, but officials tried to place the blame elsewhere. In 2007, for example, Zimbabwe declared inflation illegal (!), outlawing price increases on some commodities. The government even arrested some executives for increasing prices on commodities. Other problems occurred. People found it difficult to take money out of ATM machines because the ATMs couldn’t handle values in billions and trillions. Customers received a “data overflow error” and weren’t able to withdraw anything. By the time the ATM machines were fixed and the ATMs allowed customers to withdraw Z$100 billion per day, that amount wasn’t enough to cover the cost of a loaf of bread. If a customer wrote a check to purchase something, they were required to write the check for twice the cash price of the item to cover the impact of inflation by the time the check cleared. During the 2000s, Zimbabwe went through four currencies in four years. On July 31, 2006, Zimbabwe introduced a new Dollar with 1000 old Zimbabwe Dollars (ZWD) equal to 1 Second Zimbabwe Dollar (ZWN). On August 1, 2008, 10 zeroes were removed with 1 Third Zimbabwe Dollar (ZWR) equal to 10 billion Second Zimbabwe Dollars. On February 2, 2009, a Fourth Zimbabwe Dollar (ZWL) was introduced, removing 12 zeroes, with 1 Fourth Zimbabwe Dollar equal to 1 trillion Third Zimbabwe Dollars. Thus 1 Fourth Zimbabwe Dollar was equal to 10 trillion trillion (10,000,000,000,000,000,000,000,000) first Zimbabwe Dollars.Dollar One, Dollar Two, Dollar Three, Dollar Four
The hyperinflation produced a dazzling array of currency denominations. The highest denomination for the first Zimbabwe Dollar was 100,000 Dollars. When the first Zimbabwe Dollar was converted into the second Zimbabwe Dollar at 1000 to 1, paper currency equal to One Zimbabwe Cent was printed so old 10 Zimbabwe Dollar notes could be converted. Within a year, the Reserve Bank of Zimbabwe was printing a 100 Billion Dollar note. In total, 32 different denominations of the Zimbabwe Dollar were printed within one year.
The fourth Zimbabwe Dollar died a quick death, only reaching the Z$500 denomination before the currency was cast aside. Foreign currency was effectively legalized as a de facto currency on September 13, 2008, and on January 1, 2009, the Reserve Bank of Zimbabwe allowed U.S. Dollars to circulate freely throughout the country. The Fourth Zimbabwe Dollar remained legal tender until June 30, 2009 by which time it has lost 95% of its value in the five months of its existence. By then, transactions were almost exclusively in U.S. Dollars, the Zimbabwe Dollar having been abandoned.