The Bank of England Established

This series has four easy 5 minute installments.

Introduction

The Bank is the archetype for modern central banks. The central bank has formed the foundation of nation’s economies. Monetary policy (as opposed to fiscal policy) can be implemented through central banks. Even in the United States, where central banks were explicitly rejected during the Andrew Jackson administration, the country eventually relented and formed the Federal Reserve system of banks. The Fed is a central bank made to not look like a central bank.

Here is how the central bank came to be. The Bank of England became the foundation of Great Britain’s financial success and through that Great Britain’s superpower.

The national debt of England began in 1693, when William III, in order to carry on the war against France, resorted to a system of loans. This debt, however, was not intended to be permanent; but when the Bank of England was established, the contracting of a permanent debt began. Its advantages and disadvantages to England have been discussed by many theorists and financial authorities. But of the extraordinary service rendered to Great Britain by the far-seeing Scotchman, William Paterson, originator of the plan of the Bank of England, there is no question, although, as Francis shows, the project at first met with opposition from many quarters.

This selection is by John Francis.

Time: 1694
Place: London

The important position assumed by England, toward the middle of the seventeenth century, renders the absence of a national bank somewhat surprising. Under the sagacious government of Cromwell the nation had increased in commercial and political greatness; and although several projects were issued for banks, one of which was to have branches in every important town throughout the country, yet, a necessity for their formation not being absolutely felt, the proposals were dismissed. During the Protectorate, however, Parliament, taking into consideration the rate of interest, which was higher in England than abroad, and that the trade was thereby rendered comparatively disadvantageous to the English merchant, reduced the legal rate from 8 to 6 per cent., and this measure, although it had been carried by the Parliament of Cromwell, almost every act of which proved odious in the eyes of the Stuarts, was nevertheless confirmed by the legislature of Charles II. In 1546 the payment of interest had been rendered legal and fixed at 10 per cent. In 1624 the rate had been reduced to 8 per cent.; and with the advance of commercial prosperity it had been found advisable to lower it still further.

There were many reasons for the establishment of a national bank. It was necessary for the sake of a secure paper currency. It was required for the support of the national credit. It was desirable as a method of reducing the rate of interest paid by the state; a rate so high that, according to Anderson, men were induced to take their money out of trade, for the sake of securing it; an operation “big with mischief.” The truth is that the times required it. The theorist may prove to demonstration the perfection of his theory; the speculator may show the certainty of its success: but unless it be a necessity called for by the onward progress of society, it must eventually fall to the ground.

That the want of such an establishment was felt is certain. But while such firms as Childs — the books of whom go back to the year 1620, and refer to prior documents; Hoares, dating from 1680; and Snows, from 1685 — were able to assist the public demand, although at the exorbitant interest of the period, it does not occasion so much surprise that the attempt made to meet the increasing requirements of trade proved insufficient. In 1678, sixteen years previous to the foundation of the Bank of England, “proposals for a large model of a bank” were published; and, in 1683 a “national bank of credit” was brought forward. In a rare pamphlet entitled Bank Credit; or the usefulness and security of The Bank of Credit, examined in a dialogue between a Country Gentleman and a London Merchant, this idea is warmly defended. It was, however, simply to have one of credit, nor was it proposed to form a bank of deposit; although, by the following remark of the “Country Gentleman,” it is evident that such an establishment on a secure scale was desirable. He says:

Could they not without damage to themselves have secured the running cash of the nobility, gentry, merchants, and the traders of the city and kingdom, from all hazard, which would have been a great benefit to all concerned, who know not where to deposit their cash securely?”

After much trouble this bank of credit was established at Devonshire House, in Bishopsgate Street; its object, as we have related, being principally to advance money to tradesmen and manufacturers on the security of goods. Three-fourths of the value was lent on these, and bills for their amount given to the depositor. In order to render them current, an appointed number of persons in each trade was formed into a society to regulate commercial concerns. Any individual possessed of such bills might therefore obtain from this company goods or merchandise with as much ease as if he offered current coin.

The bank of credit does not appear to have flourished. The machinery was too complicated, and the risk of depreciation and the value of manufactures too great. It was next to impossible for such a company to exist after the Bank of England came with its low discount and free accommodations.

The wild spirit of speculation — that spirit which at various periods has created fearful crises in the commercial world — commenced in 1694. The fever which from time to time has flushed the mind of the moneyed man and given a fierce excitement to the almost penniless adventurer, was then and in the following year in full operation. The great South Sea scheme in 1720 is ordinarily considered the earliest display of this reckless spirit. But a quarter of a century before, equal ingenuity and equal villainy were exercised. Obscure men, whose sole capital was their enormous impudence, invented similar schemes, promised similar advantages, and used similar arts to entice the capitalists, which were employed with so much success at a later period.

The want of a great banking association was sure to be made a pretext. Two “land banks,” and a “London bank” to be managed by the magistrates, with several other proposals, were therefore put promisingly forward. One of these was for another “bank of credit”; and a pamphlet published in 1694, under the title of England’s Glory, will give some idea of its nature:

“If a person desires money to be returned at Coventry or York he pays it at the office in London, and receives a bill of credit after their form written upon marble paper, indenturewise, or on other as may be contrived to prevent counterfeiting.” It was also proposed that the Government should share the profits; but neither of the projects was carried out.

Continued.

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