Front Page Titles (by Subject) SECTION II.: FOUNDATION OF THE BANK OF ENGLAND. - A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.)
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SECTION II.: FOUNDATION OF THE BANK OF ENGLAND. - Editor of the Journal of Commerce and Commercial Bulletin, A History of Banking in all the Leading Nations, vol. 2 (Great Britain, Russian Empire, Savings-Banks in the U.S.) 
A History of Banking in all the Leading Nations; comprising the United States; Great Britain; Germany; Austro-Hungary; France; Italy; Belgium; Spain; Switzerland; Portugal; Roumania; Russia; Holland; The Scandinavian Nations; Canada; China; Japan; compiled by thirteen authors. Edited by the Editor of the Journal of Commerce and Commercial Bulletin. In Four Volumes. (New York: The Journal of Commerce and Commercial Bulletin, 1896). Vol. 2 A History of Banking in Great Britain, the Russian Empire, and Savings-Banks in the U.S.
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FOUNDATION OF THE BANK OF ENGLAND.
Financing of the War Against Louis XIV.—Failure to Borrow from the Bankers—Bank of England Established—First Issue of Notes Against Securities—Debasement of the Coinage—Lowndes’ Report—Suspension by the Bank—A Fictitious Increase of the Bank’s Capital—The Bank Made a Monopoly, and Exempted from the Usury Laws—The Bank “Rest” Introduced—Extension of Its Charter.
THE chief object which tempted the ambition of William of Orange to obtain the crown of England was to head the great European alliance against the overwhelming power of France. No sooner was William pretty firm on his throne than he declared war against Louis XIV. Parliament was eager for the war, and readily voted supplies; but they were scarce and difficult to be got in. The Government at first attempted the old plan of mortgaging the grants to be voted by Parliament, but they were not successful. In 1690. Parliament began the system of allowing money to be raised on short annuities, which was attended with good success. The increasing expense of the war, however, rendered this plan too burdensome; and, in 1692, a plan was brought forward for raising duties for the space of ninety-nine years to pay the interest of an intended loan of £1,000,000 upon a tontine scheme. The subscribors were to receive ten per cent. till 1700; and after that £7000 per annum was to be divided among the survivors till their number was reduced to seven; when, upon the death of each, his annuity was to lapse to the State. So low was the credit of the Government that only £108,000 was obtained on these tempting terms; and a clause was introduced by which the subscribers might receive fourteen per cent. upon any life they chose to nominate. But these schemes produced only £881,493. All these devices, however, failed of producing an adequate supply of money to support the war, which languished in consequence. The fatal proceedings of Charles II. seem to have ruined the bankers; or at least deterred them from making advances to Government in their former style. The Government was obliged to revert to the humiliating plan of borrowing from every one in the city on whom they could prevail to lend. They were obliged to solicit the Common Council of London for so small a sum as £100,000; and if they granted it, the Councilmen had to make humble suit to the inhabitants of their respective wards, going from house to house for contributions; and for these advances they had to pay in premiums, discount and commissions from thirty to forty per cent.
The inextricable financial difficulties of the Government turned attention towards a scheme for a public bank, such as existed in several of the Italian States. Mr. William Paterson, a Scotchman from Dumfriesshire, whose antecedents were gravely suspected, and who was so notorious for his Darien scheme, which ruined half Scotland, but who had traveled widely, and studied foreign financial institutions, proposed several schemes which proved abortive. At last, one succeeded. He proposed to raise and circulate £1,200,000 upon a fund of £100,000 a year. Some party jealousy came at the opportune moment to assist him. Mr. Michael Godfrey, brother of Sir Edmondbury Godfrey, and some merchants who were nettled with some transactions with the East India Company, now took Paterson up and in effect supplanted him; for, though he continued to advise and assist in the direction of the measure, Godfrey stood foremost in it, and was considered, both by the Ministers and the Parliament, as the efficient man on whom all depended, and to whom all acknowledgments were to be paid. The scheme succeeded. After the details had been settled in concert with the Ministers, it was brought before the Privy Council, and long and anxiously discussed in the presence of the Queen; and at last the Statute 1694, c. 20, was passed by which the Bank of England was established.
The Act, Statute 1694, c. 20, incorporating the Bank of England, received the royal assent on the 25th April, 1694; and its provisions, material to our present purpose, were as follows:
1. It provided that the sum of £100,000 a year should be appropriated to the encouragement of persons making a voluntary loan of £1,200,000 to the Government for the purpose of carrying on the war with France; such persons to be erected into a corporation, to be called the Governor and Company of the Bank of England, with all the usual privileges of a corporation.
2. The corporation was strictly forbidden to borrow or give security by bill, bond, covenant or agreement, under their common seal, for any sums exceeding £1,200,000, except they were permitted by act of Parliament.
Thus it will be seen that the bank advanced the whole of its capital to the State and received in exchange for it an annuity of £100,000; and also received the right to issue notes to the amount of the capital they had advanced to the Government, it being supposed that the annuity would be sufficient to support the credit of the notes. Now, the whole of the capital was advanced to the Government and put into circulation by them; and the bank was authorized to issue an equal amount of notes to be used in commerce. This, therefore, was an augmentation of the currency to the amount of £1,200,000. This was the first example of issuing notes based upon public securities—a most seductive but most dangerous principle, which was one form of Law-ism.
The immense benefit which accrued to the State by the establishment of the bank was shown by the increased vigor with which the war was carried on. Mr. Michael Godfrey, the Deputy Governor, published a pamphlet on the bank, written in a strain of the warmest congratulation upon the great success of the experiment, which he had taken so leading a part in promoting. He states that, whereas in the beginning of 1694, the Government bills were at a discount of £25 to £30 per cent., in addition to the public interest, the bank took them at par; and from the former heavy discount they had risen to a premium, so that they were then better than money; because there was seven or eight per cent. per annum benefit while they were kept, which never could have been done without the bank. He said that those who lodged their money with the bank had it as much at their disposal as if it were in the hands of the goldsmiths, or in their own chests; and he certainly countenances an accusation against the goldsmiths in contemporary pamphlets; for he says that if the money which had been lodged with them for four or five years past had been lodged with the bank, it would have prevented it from being so scandalously “clipped”; which he predicts would cost the nation some day a million and a-half or two millions to repair. He notes it as very surprising, and quite unexampled, that after the nation had been at war for six years, and had spent £30,000,000, besides great quantities of bullion being exported and captured by the enemy, that there had been so great a fall in the rate of interest, instead of a rise, as in all previous wars, which was entirely due to the bank; and he predicted that it would, in the course of a few years, reduce it permanently to three per cent. He says that, within thirty years of that time, the public had lost between two and three millions by the goldsmiths and scriveners breaking, which would not have happened if the bank had been established. Further, he affirms that there were some who were for having a forced currency of bills and tallies, thinking that they might pass as well as bank bills; but “they do not consider that it is nothing makes bank bills current but only because all those who desire it can go, when they will, and fetch their money for them”; and to force anything to pass in payment but money would soon end in confusion. He then enters into numerous arguments to show that any attempt at a forced currency would only end in damaging the public credit.
The Bank of England was a Whig project, and had been eminently successful in supporting the Government in the prosecution of the war. It had excited the warmest feelings of joy and congratulation among its friends, and the bitterest feelings of rage and indignation among its enemies and the enemies of the Government. But it received no monopoly of banking. The Government of William was composed of a mixture of Whigs and Tories. William not only reigned but governed. The resources of the Bank of England were entirely devoted to supporting commerce. But the spirit of industry began to be developed in agriculture as well as in commerce, and many schemes were devised to found a bank in the interest of agriculture. The Tory portion of the Ministry determined to get up a rival bank on a much larger scale. The capital was to be £2,564,000, advanced to Government on the same principle as that of the Bank of England, but its trading capital, notes, etc., were to be advanced solely to land owners at three per cent. It was therefore called a land bank. It was warmly patronized by the Tory party. The Bank of England and all its friends opposed it with all its power; but the temptation was too great; and it was sanctioned by Act of Parliament in April, 1696. The time for receiving subscriptions was limited, as in the case of the Bank of England. The Lords of the Treasury subscribed £5,000 on behalf of the King; but, notwithstanding all the vaporing of the Tory party, the other subscriptions only amounted to £2,100 when the time came for its closing. It was therefore a total and complete failure; but its failure, combined with other circumstances which we have now to detail, exercised a most disastrous influence on the Bank of England.
We must now retrace our steps a little, and examine the condition of the coinage, which is necessary to understanding the subsequent history of banking; for controversies on the subject then began which have lasted almost until our own times, if indeed they are yet extinct. In April, 1690, the scarcity of silver coins occasioned great public inconvenience. The goldsmiths complained to the House of Commons that they had ascertained that immense quantities of silver bullion and dollars had been exported. That many Jews and merchants had recently bought up large quantities of silver to carry out of the kingdom, and had given three-halfpence per ounce above its regulated value. That this had encouraged the melting down of much plate and milled money, whereby for six months past no bullion had been brought to the Mint to be coined. These allegations were verified by a committee of the House. It was shown that the profit of melting down the milled money for exportation was about £25 per £1,000; that the Mint price of silver was 5s. 2d. per ounce, but it was generally sold for 5s. 3 1-2d. The House in consequence passed one of their useless laws against exporting bullion. The state of the coinage now became every day more disgraceful. By law, in 1666, it was enacted that every one might bring gold and silver bullion to the Mint and have it coined free of all expense. The guinea, then first coined, was intended by the Mint indentures to be equal to 20s. in silver. But there was no legal ratio established between the coins, so as to make them compulsorily taken by the public at that rate. They were left to be received by the public at such rates as they pleased. The guinea passed current at 22s. Quantities of base and counterfeit coin were in circulation. The silver coins were being constantly clipped, so that in 1694 they had lost nearly half their weight. By the end of 1694, guineas, which had been coined to be equal to 20s., rose to 30s. in the clipped and degraded coin. The exchange with Holland, which was reckoned in the degraded silver coin, fell to twenty-five per cent. below par, and it would have fallen still lower only it was shown that the real exchange was in favor of England. The exchange with Ireland fell so much that £70 there was worth £100 in England,
The frightful condition of the coinage may be judged of by the following facts. In the months of May, June and July, 1695, 572 bags of silver coin, each of £100, were brought into the Exchequer, whose aggregate weight, according to the standard, ought to have been 18,451 lbs; their actual weight was 9,480 lbs; showing a deficiency in the weight of the current coin in the ratio of 10 to 22. Bags of coin collected in various parts of the country showed a similar deficiency. A warm controversy arose whether the new money should be coined of the old standard weight, fineness and denomination; or whether it should be depreciated, or raised in value, as it was absurdly called. This controversy was keenly disputed then, and it was revived 116 years later, when the notes of the Bank of England were depreciated, and a strong party maintained that the standard of the coin should be depreciated to the level of the depreciated notes.
Mr. William Lowndes, the Secretary to the Treasury, was ordered to make a report on the coinage. In this, he enters into a long and, at the time, valuable investigation of the history of the coinage, and its successive depreciations in weight and fineness, in which he maintained the extraordinary hallucination that the successive frauds committed by the English kings in diminishing the bullion in the coin had raised its value. His doctrine was that by raising the name of the coin it thereby acquired increased value. His proposal was either that the new coinage should be made of a diminished weight; or that the same pieces should be rated at a higher price in tale; or that 60 pence were equal to 75 pence. Locke published a reply to this infatuated idea, showing that it was quite illusory.
All this time the Bank of England, with infantine simplicity, had received the degraded coin at its full nominal value. Its notes were payable to bearer on demand. As soon as the new coin came out, they were bound to pay them in full-weighted coin—that is, for every seven ounces they had received they were bound to pay twelve ounces. Such a state of things could have but one result; an immediate run upon the bank. Its success had enraged the private bankers and money-lenders, whose profits it had diminished. All its enemies now made a combined effort to destroy the Bank. They collected its notes in all directions, and on the 5th May, 1695, they suddenly presented them for payment. The directors, knowing the purpose for which these notes were presented, refused payment of them, but continued their payments to their ordinary customers. Their enemies ran about crying out that the Bank was destroyed. But the public, who quite understood the transaction, received their notes at first at their full value. The extreme scarcity, however, of silver continuing, compelled the Bank to make a general suspension. The managers gave notice that they could only pay ten per cent. on their notes once a fortnight; and as the demand continued they were unable to maintain even that payment, and a short time later they gave notice that they could only pay three per cent. every three months. On the 3d of August, bank notes were at a discount of fourteen and fifteen per cent. and exchequer tallies at thirty per cent. Fresh coin, however, continued to be issued from the Mint, and the exchanges, which were reckoned in the silver coin, were restored to par, although the bank notes were at a heavy discount.
Parliament met in October, 1696. At that time, bank notes were at a discount of twenty per cent. and exchequer tallies at forty, fifty and sixty per cent. discount, while at the same time the exchanges were at par. When the Bank of England was obliged to suspend payments in cash, it endeavored to retrieve its credit by making two calls of twenty per cent. each on its proprietors. These measures, however, were not successful, and Parliament had to take in hand the business of restoring the credit of the bank notes and exchequer tallies. By an Act of Statute, 1697, the capital of the bank was to be increased, and the subscriptions might be paid, four-fifths in exchequer tallies and one-fifth in bank notes, upon which the Crown would allow eight per cent. The time when the Crown might put an end to the corporation was prolonged to twelve months after the 1st August, 1710, and repayment of all Parliamentary debts. During the continuance of the corporation, no other bank, or any other corporation, society, fellowship, company, or constitution in the nature of a bank, should be erected or established, permitted, suffered, countenanced or allowed by act of Parliament within England. The bank was allowed to extend its issues of notes beyond the original capital of £1,200,000 to the amount of new capital which should be subscribed, provided that they were made payable to bearer on demand. We observe that the depreciated notes of the bank itself were taken at their full value at par, and treated as capital; the first practical instance on a great scale in this country of the doctrine that the release of a debt is in all respects equivalent to a payment in money: or the algebraical doctrine that − × − = + × +.
One reason probably that bank notes were at such a heavy discount was that there were none under £20; and those were of little use in current transactions. Montague, the Chancellor of the Exchequer, hit upon the plan of issuing bills upon the exchequer for £5 and £10. These bills passed, at first, at a small discount; but, upon the second issue of them, interest at £7 12s. per cent. was allowed upon them, and they were received at par in payment of taxes. They then rose to par. The Treasury was authorized to contract with any persons to cash these exchequer bills on presentment, allowing them a moderate premium. They were allowed ten per cent. at first; but the exchequer bills soon rose above par, and the interest upon them was reduced to four per cent. Under this act, upwards of £2,000,000 of exchequer bills were issued. The new subscription to the bank under this act amounted to £1,001,171 10s.; £200,000 being paid in bank notes and £800,000 in exchequer tallies. These large amounts were taken out of circulation and received at par in the subscription, which raised the value of the remainder; and in the course of the year bank notes which bore no interest were at par, and those which bore an interest were at a premium.
In 1709 the Government were in great pecuniary embarrassment. The produce of the taxes barely covered half of the expenses. The Ministry sought the assistance of the bank; and the following terms were accepted and ratified by Parliament: 1. The interest upon their original stock of £1,200,000 was reduced to six per cent., with an allowance of £4000 for managing the debt. 2. The bank was to advance a further sum of £400,000 at six per cent. interest. 3. The bank might double its then capital of £2,201,171 10s. at the price of £115 per cent. for the new stock. The bank agreed to circulate £2,500,000 of exchequer bills and receive an allowance of six per cent., one-half for interest and the other for repayment of the principal: that no more exchequer bills should be issued without the consent of the bank. 4. Their privileges as a corporation should be continued for twenty-one years from the 1st of August, 1711.
The Act of 1697 had only provided that no other bank should be erected or allowed by Act of Parliament; it did not prohibit private joint stock banks from being founded, nor any other corporation or company from setting up banking business. A company called the Mine Adventurers of England, at the head of which was Sir Humphrey Mackworth, who turned out to be a great rogue, commenced doing banking business of all sorts, issuing notes, etc. To put a stop to this it was enacted: “That during the continuance of the said Corporation of the Governor and Company of the Bank of England, it shall not be lawful for any body politic or corporate whatsoever, erected or to be erected (other than the said Governor and Company of the Bank of England), or for any other person united or to be united in covenants or partnership exceeding the number of six (now ten) persons in that part of Great Britain called England to borrow, owe, or take up any sum or sums of money on their bills or notes payable at demand, or at any less time than six months from the borrowing thereof.”
The Bank of England was strictly forbidden to issue notes to a larger amount than their capital stock. That is, each loan to Government was attended with an augmentation of currency to an equal amount. Now, to a certain small extent, this plan might be attended with no evil consequences; but as a scientific principle it is utterly vicious. This is indeed one form of John Law’s Theory of Money. His scheme of basing paper money on land, is sober sense compared to it; because in that, the quantity of paper money was limited to twenty years’ purchase of the land. But in such a scheme as basing paper money on the public debt, there is absolutely no limit whatever. If this principle had been carried out to the present time, we should have had a national debt of about £800,000,000, and bank notes to the amount of £800,000,000.
At this time, no one had framed a definition of banking; but the issue of notes was considered to be so essentially “banking” that to prohibit that was supposed to be effectual in prohibiting banking. The clause quoted above was intended to disallow any bank being formed with more than six partners, so as to prevent any private company from being formed of sufficient power and influence to rival the bank; and it did have that effect for more than a century.
When we consider the unquestionable services the bank had rendered to the Government, which contributed so greatly to the success of the war and the pacification of Ryswick, and when we consider the terrific state of public credit when the Land Bank project failed, and the calamity of the Mine Adventurers, we need not be surprised that the Bank of England employed these circumstances for the purpose of securing a monopoly for themselves. Now, considering the ideas of the age, can we be surprised that they received it? Nevertheless, after making due allowances for these circumstances, it is one of the most deplorable acts which have come down to our times. The founders and contemporaries of the bank felt the benefit of its eminent services; but the consequences of this original sin fell with fearful force on their descendants of succeeding generations. The frightful convulsions and collapses of public credit which have taken place for more than a century, are chiefly due to this great wrong and violation of the true principles of trade. English banking has never recovered from its fatal effects to this day, and many years must elapse before it will arrive at the form to which it is tending, and which it would naturally have assumed, if its development had been left free to the skill and experience of men of business. We shall later show how much more wisely the people of Scotland acted with respect to their bank.
In 1713, the financial difficulties of the Government at the peace of Utrecht made it necessary to have recourse to the bank. It agreed to lend the Government £100,000, secured upon exchequer bills at three per cent., upon receiving an extension of their charter, which had still twenty years to run. By the Statute I. 1713, c. 11. its existence as a corporation was prolonged to twelve months’ notice, to be given after the 1st August, 1742, and the payment of £1,600,000.
The excessive absurdity and inconvenience of the usury laws were even then felt, and the bank was exempted from their operation in 1716. In the quaint phraseology of the act, they were authorized “at their own good liking” to borrow, owe, or take up money at any rate of interest they pleased, above the legal rate, upon their bonds, bills, or any obligation under their common seal, or upon credit of their capital stock for any time, or to be paid upon demand. What portentous folly it was that anyone else might not observe “his own good liking” in the rate he paid for a loan of money. Yet this egregious folly was not relaxed till 1833, nor finally swept away till 1854. The Bank of France was similarly exempted from the usury laws after the panic of 1857. The bank’s existence was prolonged indefinitely until all the public debts due to it were discharged.
In 1717, guineas were finally made current at 21s., although Sir Isaac Newton showed that their value in the markets of the world was only 20s. 8d. The effect of this was that, although gold and silver coin were equally legal tender, all the good silver left the country, being more valuable abroad than at home; and it became an established custom among merchants that all bills of exchange were understood to be payable in gold, as being the cheaper metal. The exchanges continued to be reckoned in silver, but were actually paid in gold, which rectified them; and, from this period, England became practically a gold monometallic country; although the law of bimetallism lingered on in the statute book for another hundred years.
Up to 1722, the bank divided the whole of its profits among the shareholders, and made no reserve for contingencies. The dividend varied from 18 1-4 per cent. in 1706 to 6 per cent. in 1722. The inconvenience was strongly felt, as well as having no friend to fall back upon in cases of emergency. These had hitherto been met by making calls on the proprietors. In this year the directors established a reserve fund, which is termed the Rest.
When the charter had been renewed on former occasions, there had been many public discussions as to the expediency of the bank’s monopoly. It had always purchased its privileges by aiding the Government. As the time was drawing near for the expiring of its charter, in 1742, these discussions became more frequent and animated, and several attempts were made to set up banks in such a manner as not to violate the clause in the Act of 1709. When the time for the renewal came, the Government were, as usual, in difficulties, and the bank agreed to lend them £1,600,000 without interest. To raise this sum, they made a call upon their proprietors, which raised their capital stock to £9,800,000. In consideration of this, their exclusive privileges were continued till twelve months’ notice after the 1st of August, 1764. It was also determined to stop up all loop-holes in the Act of 1709; and the following clause was inserted in the Act, Statute 1742, c. 13, s. 5:
“And to prevent any doubts that may arise concerning the privilege or power given by former acts of Parliament to the said Governor and Company of exclusiveBanking; and also in regard to the erecting of any other bank or banks by Parliament, or restraining other persons from banking, during the continuance of the said privilege granted to the Governor and Company of the Bank of England, as before cited; it is hereby further enacted and declared by the authority aforesaid, that it is the true intent and meaning of the act that no other bank shall be erected, established or allowed by Parliament; and that it shall not be lawful for any body politic or corporate whatsoever, united or to be united, in covenants or partnership exceeding the number of six persons, in that part of Great Britain called England to horrow, owe, or take up any sum or sums of money, on their bills or notes payable at demand, or at any less time than six months from the borrowing thereof, during the continuance of such said privilege of the said Governor and Company, who are hereby declared to be and remain a corporation, with the privilege of exclusiveBanking, as before recited.”
This clause demands the most earnest attention, because it is the one which contains the sole monopoly of the Bank of England, which has recently attracted considerable attention. It is a penal clause, and therefore of course to be construed strictly; and we must now examine its force and effect. All “Banking” consists in “Issuing” rights of action, or credit in exchange for money and securities. When a banker has once issued this right of action, credit or deposit, to his customer, the customer may transfer this right of action to any one else by two methods: (1) Either by the banker giving him his promissory note to pay the money to himself, or to his order or to bearer; (2) The customer may write a note to his banker, in modern language termed a cheque, directing him to pay a sum to some person, or to his order or to bearer. Now, Parliament undoubtedly intended to confer an absolute monopoly of banking on the Bank of England; and if it had been enacted in general terms that the bank was to have an absolute monopoly of “banking,” such words would have been effectual. But, unfortunately for their own purpose, though fortunately for the country, they proceeded to define “banking,” and they restricted their definition to only one of the two methods of circulating bank credits—that of bank notes. Consequently, the monopoly was restricted to that single method of circulating banking credits and left the other method,—by means of cheques,—untouched. The fact was that, at that time, the system of cheques was very undeveloped, and no one conceived that “banking” could be carried on without issuing notes, as indeed the fact was in those days. But subsequently cheques prevailed over notes; and when it was afterwards discovered that “banking” could be carried on without notes, the lacuna in the monopoly of the bank became clear to lynx-eyed economists, and ultimately led to the formation of joint stock banks in London.
In September, 1745, the rising in Scotland assumed formidable dimensions. The Chevalier captured Edinburgh, and the news produced a run upon the bank. Bank notes fell to a discount of ten per cent. A meeting of 1600 of the most eminent merchants was held, who pledged themselves to support the credit of the bank notes. In 1746, the bank again assisted the Government. The proprietors authorized the directors to cancel £986,000 of exchequer bills on receiving an annuity of four per cent., and to create new stock for the purpose. The capital of the bank then became £10,780,000, and was not further increased till 1782. In 1750, the interest on £8,486,000 of the Government debt was reduced to three per cent. In 1759, the bank began to issue notes for £15 and £10. In 1764, the bank’s charter was renewed. The terms were an absolute gift of £110,000 to the nation, and a loan of £1,000,000, on exchequer bills for two years at three per cent. interest.