Bank of England Is Chartered Summary

  • Last updated on November 10, 2022

The chartering of the Bank of England created a central bank that provided financial support to the British government and consolidated control of its financial systems.

Summary of Event

One of the oldest of the European national banks, the Bank of England was chartered in 1694, establishing a trend followed by most major Western nations during the subsequent three hundred years. Sweden had created its own “central” bank, the Riksbank, almost fifty years before the Bank of England, but neither it nor the other European government-originated banks, such as the Bank of Amsterdam in Holland, created in 1609, truly had central banking powers. Technically, a central bank not only acts as a lender of last resort to the private sector and furnishes loans to the government but also regulates the financial system through its use of reserves. No European bank possessed that capability, well into the 1800’. [kw]Bank of England Is Chartered (July 27, 1694) [kw]England Is Chartered, Bank of (July 27, 1694) Economics;July 27, 1694: Bank of England Is Chartered[3030] Government and politics;July 27, 1694: Bank of England Is Chartered[3030] Organizations and institutions;July 27, 1694: Bank of England Is Chartered[3030] Trade and commerce;July 27, 1694: Bank of England Is Chartered[3030] England;July 27, 1694: Bank of England Is Chartered[3030] Bank of England Paterson, William Montagu, Charles Houblon, John

The Bank of England originated with the seizure of merchants’ funds by King Charles I, after the funds had been deposited in the Tower of London. The merchants had intended to use the money to pay overseas debts, but Charles needed it to cover expenses arising from his Scottish wars. Although the king gave back the money—in return for a loan of forty thousand pounds—the outraged merchants knew they no longer could leave deposits at the tower, choosing instead to keep the funds in their stores under the authority of their employees. After the English Civil Wars erupted, however, the clerks started to lend the money to local goldsmiths at four pence a day. The goldsmiths proved trustworthy and inspired confidence in the business community.

As with most national banks, however, the true impetus for creating such an institution came from the government’s chronic need for funds. William Paterson, Paterson, William a Scottish promoter, part-time merchant, and full-time adventurer, had hatched three separate ideas to provide the Crown with money. Under his plans, Paterson and his fellow merchants received interest, while the king had his loan. In the context of defending the bank concept, Paterson wrote a pamphlet outlining the necessity for a bank. In 1693, Paterson put forth his third scheme along with a group of London merchants, to lend the government 1.2 million pounds at 8 percent interest. Ultimately, Charles Montagu, Montagu, Charles later the earl of Halifax, championed the concept. The lords of the treasury, after considering several plans, found Paterson’s the most appealing.

Actually establishing the bank proved rather easy: The bank was created under the authority of sixteen sections of the Tunnage Act of 1694 Tunnage Act of 1694 , for the purpose of paying into the exchequer the sum of 1.2 million pounds. Commissioners received subscriptions, and the institution was chartered as The Governor and Company of the Bank of England. No individual could subscribe for more than twenty thousand pounds. The bank could deal in bills of exchange, could buy and sell bullion, and sell commodities deposited as securities for loans that were not redeemed at the agreed upon date (or three months thereafter). Sir John Houblon Houblon, John was the first bank governor, and William Paterson one of the twenty-four directors. A second bank act increased the bank’s original capital from 1.2 million pounds to more than 2.3 million pounds. Although the official name was the Bank of England, people often referred to the bank in its first one hundred years generally as the Bank of London.

The government attempted to give the bank a monopoly, but its charter’s prohibitory enactments did not curtail private corporations from conducting banking activities. Consequently, in 1709, the bank’s partial monopoly was tightened, with Parliament making it illegal for any group of people to “borrow, owe, or take up any sum or sums of money on their bills or notes, payable at demand, at any less time than six months from the borrowing.” The bank paid interest on deposits, and could issue its own notes (paper money).

By the Wars of the Spanish Succession (1701-1714) Spanish Succession, Wars of the (1701-1714) , the English government became totally dependent on the bank and its loans for funding, with Parliament providing six short-term renewals between 1696 and 1781. Every renewal involved fighting a war or paying for the results of one. Developing a banking policy out of a string of crises gave the Bank of England neither a clear definition nor a role. As a result, it lagged far behind the major banks of Holland, Germany, and Sweden. The bank’s focus differed substantially from the policies of Alexander Hamilton, whose program as first U.S. Secretary of the Treasury almost a century later resulted in the creation of the Bank of the United States (BUS). Hamilton’s financial design emphasized providing a stable money supply and solid credit rating for the United States, while the Bank of England’s major role remained the financial support of government.

Over time, however, the Bank of England found that it had to discount bills, secure deposits, and act as a lender of last resort, forcing some discipline on the bank itself. The state-oriented nature of the bank stifled the development of a healthy private-sector banking system as had emerged in neighboring Scotland. In Scotland, there evolved a system of “free banks,” which had no monopoly over note issue and thus had to compete with each other’s money. The Bank of England not only slowed the appearance of private banking but also found itself as dependent on the state as the state was on it. Most advances to the English treasury, for example, were in the form of interest-bearing loans; in return, the bank received charter extensions. Yet as joint-stock companies started to appear, they made direct payments to the government for monopoly privileges, leading many to think that the state had not gained as much from its relationship with the bank as it could have. As with any monopoly, the bank also raised suspicions that it wielded undue political influence. Other corporations in London complained that the situation encouraged the bank to meddle in domestic politics. The Bank of England, as did the later Bank of the United States, soon came under fire for its cozy connections with the government, while the government was charged with being controlled by the monied interests.

Each charter renewal expanded the bank’s capital and its power. The capital rose from 1.2 million pounds in 1694 to 10.7 million pounds in 1742. Loans to the government, however, grew even faster. By 1749, the government owed the bank 11.6 million pounds. English finance, therefore, was born and continued to live in a borrowing mode. Again, that stood in contrast to the American financial structure, devised by treasury secretary Hamilton, who had made it a priority to limit the amount of debt the U.S. Congress could incur by creating a sinking fund in which old debt had to be retired before new debt could be assumed. In that context, the reason for creating the Bank of the United States was to help eliminate all the old debts.

The Bank of England’s monopoly over note-issue functions in England made it impossible for the private sector to instill discipline on the financial sector. Not only had the 1709 act virtually prohibited private banks from printing money, but it made the bank substantially different from the Continental banks and the Bank of the United States, all of which had to compete at some level. In the United States, for example, each state had its own chartering process in which banks were granted the authority to issue notes. Consequently, the Bank of the United States could not issue notes indiscriminately, or their value would drop relative to the value of the state notes.

Yet the Bank of England enjoyed the confidence of the London merchants because the government did not underwrite the bank’s revenues directly. The paper it issued for circulation and the paper it provided to the government technically remained separate, although foreigners found it difficult to distinguish between the two. London merchants had found the bank generally reliable, not subject to runs, and therefore did not hesitate to place their deposits there. The bank’s monopoly position enhanced its accumulation of deposits, which in turn provided the basis for mercantile, as well as government, credit. Thus, despite the lack of competition, the bank remained sound throughout the 1700’s and its stock remained above par for fifteen of the bank’s first twenty years. In addition, the bank kept a sharp focus on the commercial activities in and around London, and refrained from underwriting ambitious development or overseas projects, further adding to local confidence.

Significance

Private business dealings remained a small portion of the bank’s overall activities, however. It discounted local notes and serviced the needs of merchants, but was careful not to emit too many notes. It kept a bullion-to-paper ratio of as little as 19.7 percent; in one year—1763—the bank’s reserves fell so low that it had only seven ounces of gold for every one hundred pounds in circulation. Yet the bank proved so cautious in its lending that from 1694 to 1788, it lost only sixty-eight thousand pounds in bad paper. It did not see its role primarily as a lender of last resort to other banks, and when the Scottish Ayr Bank pleaded for funds in 1772, the Bank of England only offered the strictest terms, which the Scottish bank could not pay, and it subsequently failed. Investors and London merchants, however, viewed such actions as positive signs that the Bank of England was solid and solvent.

The Bank of London made the transition to a true national bank, the Bank of England, in the 1800’, when it began to extend its influence over the economy as a whole. After the Napoleonic wars, for example, the bank’s directors engaged in a discussion about the conditions under which it would resume cash payments for paper. Even then, the directors argued simultaneously for more authority and less control from the government, and yet resisted the notion that the bank had any responsibility for the economy. The government reviewed the entire banking policy and the relationship between the bank and the government. Out of those 1819 discussions, the Bank of England’s functions changed more toward that of a central bank in the modern sense, with greater control over the economy but also greater political control.

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Andreades, A. History of the Bank of England, 1640-1903. 1909. Reprint. New York: Augustus M. Kelley, 1966. This source contains substantial material on the early history and environment of the Bank of England. Based upon early primary-source documentation.
  • citation-type="booksimple"

    xlink:type="simple">Calomiris, Charles. “Alexander Hamilton.” In The Encyclopedia of American Business History and Biography: Banking and Finance to 1913, edited by Larry Schweikart. New York: Facts On File, 1990. This biographical sketch provides a good comparison to the conceptual framework of central banking. Calomiris argues that Hamilton—considered usually as pro-big government—established constraints on government growth in the way he structured the borrowing powers and the national bank.
  • citation-type="booksimple"

    xlink:type="simple">Clapham, John. The Bank of England: A History. Cambridge, England: Cambridge University Press, 1944. The classic work on the Bank of England. Although some of the modern debates over the role of “free banking” or competitive note issue are absent, this work remains a standard source.
  • citation-type="booksimple"

    xlink:type="simple">Dickson, P. G. M. The Financial Revolution in England: A Study in the Development of Public Credit, 1688-1756. New York: St. Martin’s Press, 1967. Excellent for understanding the political side of the bank’s origins.
  • citation-type="booksimple"

    xlink:type="simple">Forrester, Andrew. The Man Who Saw the Future: William Paterson’s Vision of Free Trade. New York: Thomson/Texere, 2004. In the first modern biography, Forrester argues that Paterson’s vision of world commerce was far ahead of its time.
  • citation-type="booksimple"

    xlink:type="simple">Richards, R. D. The Early History of the Bank of England. New York: Augustus M. Kelley, 1965. Richards provides excellent early material, and reprints the text of entire documents, including letters and the bank’s balance sheets. Unfortunately, Richards’s work suffers from the absence of any modern discussions of central bank theories.
  • citation-type="booksimple"

    xlink:type="simple">Roberts, Richard, and David Kynaston, eds. The Bank of England: Money, Power, and Influence, 1694-1994. Oxford, England: Clarendon Press, 1995. A modern series of essays, this collection examines all aspects of the bank, citing updated scholarship. Especially useful is H. V. Bowen’s introductory history, “The Bank of England During the Long Eighteenth Century, 1694-1820,” which analyzes the bank’s political relationships.
  • citation-type="booksimple"

    xlink:type="simple">Smith, Vera C. The Rationale of Central Banking. London: P. S. King, 1936. An early, but still useful overview of the principles of central banking from the perspective of Depression-era England.
  • citation-type="booksimple"

    xlink:type="simple">White, Lawrence. Free Banking in Britain: Theory, Experience, and Debate, 1800-1845. New York: Cambridge University Press, 1984. The best work on the system that developed within Scotland and stood in stark contrast to the monopoly in England. White argues that private, competitive note issue provided a sound alternative to government control over money supply.

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