FOUNDATION AND GROWTH OF THE BANK OF ENGLAND
In tracing the history of our financial system we now come to the
important event of the establishment of the Bank of England.
About the year 1691 the Government of William and Mary experienced
considerable difficulty in raising the necessary funds to prosecute
the war with France; but “the hour brings the man.” The man on this
occasion was William Paterson, a merchant of Scotland, who had been
educated for the Church, but had led a varied and adventurous life.
The scheme he presented for the consideration of the Government for
the relief of the situation was the foundation of a public joint-stock
bank; which, in return for certain powers and privileges to be
conferred, should advance money to the Government. His scheme, though
well received in official circles, produced very great opposition from
many classes of the public, who thought they would be prejudiced by
such an institution.
The goldsmiths thought they saw in it the destruction of their
business, the money-lenders a reduction in the rates of interest
obtainable, certain merchants a reduction of their profits on
Government contracts, while the political opponents of the Government
and the king saw that the scheme, if efficiently carried out, would
naturally strengthen the former and give the latter a firmer position
than he occupied at that time; and all these interested parties with
one accord joined forces and condemned the scheme.
But in spite of all opposition the Bill establishing the Bank of
England was successfully carried through Parliament, and obtained the
royal assent on the 25th April, 1694.
The basis of the Bill was that £1,200,000 should be voluntarily
subscribed by the public, and that the subscribers should be
incorporated into a body, to be known as “The Governor and Company of
the Bank of England.”
The whole of the sum forming the capital of the Bank was to be lent to
the Government, for which the Bank was to receive interest at the rate
of 8 per cent. per annum, together with an allowance of £4,000 per
annum for management and expenses; making in all £100,000 per annum.
It was also provided that the sum of £300,000 was to be raised by
public subscription, for which the contributors were to receive certain
terminable annuities.
By its first Charter, which was for ten years only, the Bank of England
was not allowed to borrow or owe more than the amount of its capital;
which meant that it could issue notes to the extent of its capital and
no more. If this amount were exceeded the members were liable for such
excess, in their private capacities, in proportion to their holding of
stock.
The capital of the Bank was subscribed in a few days, and when duly
paid up, the agreed sum of £1,200,000 was handed in to the Exchequer.
Such in brief was the foundation of the Bank of England, and though
its establishment quickly had a beneficial effect on the community at
large, in curtailing the ruling rates of interest, yet its early years
were marked by great trouble and many vicissitudes. Certain persons who
had opposed its establishment from personal motives saw some of their
worst fears being realised in the reduction of their profits, and they
were not slow to take advantage of every opportunity which presented
itself to throw obstacles in the path of their young though powerful
rival, and to unite in efforts to thwart its progress.
With a Government always wanting more financial help, in season and out
of season, with debased currency, and with enemies on every side, the
position of the directors of the Bank was no enviable one; and it was
only by great energy, united effort, and perseverance that they were
able to keep their heads above water, and struggle on until at last
they found themselves on safer and firmer ground.
The Charter originally granted to the Bank was for ten years only,
as we have already seen; but this Charter has from time to time been
renewed, and also varied—sometimes in favour of the Bank and sometimes
curtailing its privileges. The monopoly of joint-stock banking was
not granted to the Bank by its first Charter, but this monopoly was
practically conferred on it in 1708. The Act passed in that year
provides:—
“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, created or to be created (other than the said
Governor and Company of the Bank of England), or for any
other persons 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
borrow, owe, or take up any sum or sums of money on their
bills or notes, payable at demand, or at a less time than
six months from the borrowing thereof.”
In spite of its many embarrassments, the following extract from the
_London Magazine_ of 1737 shows how well the Bank of England had come
to be thought of by that time:—
“There certainly never was a body of men that contributed
more to the public safety than the Bank of England.
This flourishing and opulent company have, upon every
emergency, always cheerfully and readily supplied the
necessities of the nation, so that there never have been
any difficulties—any embarrassments—any delays in
raising the money which has been granted by Parliament
for the service of the public; and it may very truly be
said that they have, in very many important conjunctures,
relieved the nation out of the greatest difficulties, if
not absolutely saved it from ruin.”
We pass on now to the end of the eighteenth century, when the country
was plunged in the throes of war and financial difficulty. Up to this
time the Bank, since its foundation, had succeeded in meeting its
notes when presented; but in the year 1796 a steady drain on the
reserve of the Bank commenced, owing to the fear of invasion. This
drain began to assume a very serious aspect in the early part of
1797, and it appeared probable that the Bank would be subjected to
the danger and humiliation of a temporary stoppage. The directors,
fully aware of this danger ahead of them, laid the position before
the Government, and left the solution of the difficulty in its hands.
After due consideration, an Order in Council was issued on the 26th
February, 1797, requiring the Bank _not_ to pay its notes in gold. On
the following day this Order was made public, and the Bank issued the
following notice:—
“BANK OF ENGLAND, _February 27th, 1797_.
“In consequence of an order of His Majesty’s Privy
Council, notified to the Bank last night, a copy of which
is hereunto annexed, the governor, deputy-governor, and
directors of the Bank of England think it their duty to
inform the proprietors of the bank stock, as well as the
public at large, that the general concerns of the Bank are
in the most affluent and prosperous situation, and such as
to preclude every doubt as to the security of its notes.
The directors mean to continue their usual discounts for
the accommodation of the commercial interest, paying the
amount in bank-notes, and the dividend warrants will be
paid in the same manner.”
This suspension of cash payments was a very drastic measure to take;
but the public, recognising the difficulties of the situation, and
appreciating the means which were being taken for the general safety,
at once fell in with the spirit of the Order, and a meeting of
merchants and bankers was held and passed the following resolution,
which received very general support:—
“That we, the undersigned, being highly sensible how
necessary the preservation of public credit is at this
time, do most readily declare that we will not refuse to
receive bank-notes in payment of any sum of money to be
paid to us, and we will use our utmost endeavours to make
all our payments in the same manner.”
An Act was passed in the following May, confirming the action of the
Privy Council, but authorising the Bank to pay out sums under twenty
shillings in cash, and also allowing certain bankers to have a stated
amount of cash. This Act restricted the payment of cash for a period
of fifty-two days only, but before it expired a further Act was passed
extending the period of restriction, and subsequently other Acts were
passed greatly prolonging the period; and it was not until 1823 that
the restriction was entirely withdrawn, although as a matter of fact
the Bank really resumed paying in cash on demand on May 1st, 1821,
deeming it then safe to do so.
Although a period of safety and prosperity then appeared to have
dawned, the Bank was not quite clear of its troubles. The very
prosperity of the times led imperceptibly to another period of distress
and danger, culminating in the panic of 1825.
The year 1824 was notable for a very great increase in the number of
joint-stock companies which were promoted or suggested, and also of
loans to foreign countries; and a period of intense excitement and
speculation ensued. This was followed by the inevitable crisis, which
developed into a panic at the end of 1825, when a large number of
London and country bankers had to stop payment. The reserve of the
Bank was reduced to a merely nominal figure, and the Bank authorities
themselves suggested that they should again be “restricted” as to
payments; but the suggestion was firmly resisted by the Government.
Fortunately, at the lucky moment, an old box which had been stored
away was remembered. It contained a large quantity of £1 notes, and
these the Bank at once commenced to issue. This issue had very quick
and beneficial results. The notes were readily received by the public
in exchange for the notes of private bankers, the demand for bullion
ceased; and Mr. Harman, giving his evidence before a parliamentary
committee inquiring into the causes of the panic, stated it was his
opinion that this issue of small notes “saved the credit of the
country.”
In 1826 the Bank of England, by arrangement with the Government,
agreed to establish branches in various parts of the country, and gave
up their monopoly of joint-stock banking, except within a radius of
sixty-five miles of London.
The year 1833, however, saw a further restriction in the powers of
the Bank, when, after protracted negotiations, and in return for a
further renewal of its Charter, the Bank surrendered its monopoly of
joint-stock banking entirely, provided that no bank having more than
six partners might issue notes within the sixty-five-mile limit of
London.
It is a curious point that the Charter of the Bank never did restrict
joint-stock banking in its present accepted form, but only _the
issue of notes_ by joint-stock bankers or banks having more than
six partners. Up to this time the issue of notes by a bank had been
thought to be its main business; so much so, that it was believed to
be useless to attempt to conduct a bank without power of issue, and
consequently no joint-stock bank had been founded. But about this
time the need of such institutions began to be felt, and the presumed
monopoly of the Bank of England was called in question—largely by Mr.
Gilbart, the founder of the London and Westminster Bank. The Bank tried
to assert their monopoly, but without success, and in order to settle
the matter effectually, the following clause was inserted in the Act
passed in 1833 dealing with the Bank Charter:—
“Be it therefore declared and enacted, that any body
politic or corporate, or society, or company, or
partnership, although consisting of more than six persons,
may carry on the trade or business of banking in London,
or within sixty-five miles thereof, provided that such
body politic or corporate, or society, or company, or
partnership, do not borrow, owe, or take up in England,
any sum or sums of money on their bills or notes payable
on demand, or at any less time than six months from
the borrowing thereof, during the continuance of the
privileges granted by this Act to the said Governor and
Company of the Bank of England.”
It may be noted that this Act of 1833 constituted Bank of England notes
a legal tender, except by the Bank itself or its branches.
When the Bank of England first commenced business in 1694, it was
located in the Hall of the Grocers’ Company, in which building it
continued to conduct its operations until the year 1732. A slight
dispute then arising with the Grocers’ Company as to a renewal of the
lease of their hall, it was decided by the authorities of the Bank to
acquire a building of their own. Accordingly premises were obtained in
Threadneedle Street upon a portion of the present site, and Lawson in
his _History of the Bank of England_ gives the following details as to
the same:—
“The original extent of the Bank comprehends the site of
the house and garden belonging to Sir J. Houblon, one
of the first directors. It was a comparatively small
building, invisible from the street, and surrounded by
other buildings, one being the church of St. Christopher
le Stocks, and the others consisting of five inns and
twenty private houses. As the business and importance of
the Bank grew, the surrounding premises were acquired from
time to time and demolished, and the present building was
gradually erected. Although the church of St. Christopher
shared a similar fate with the surrounding buildings, the
churchyard was preserved, and now forms what is known as
the ‘Garden’ of the Bank.”
Lawson states that one of the clerks of the Bank, of the name of
Jenkins, was buried in this consecrated ground. The cause of this
interment in such a place arose out of a fear, as expressed by his
relatives, that in consequence of his singular height (he was about
seven feet tall), his body would be exhumed by body-snatchers if buried
elsewhere. The sequel to this episode is within the writer’s personal
knowledge. Having to pay a visit to a dentist some few years ago, he
was shown, as a curiosity, an enormous human lower jaw-bone with a full
set of perfect teeth. Judging from its size, the dentist said that it
had evidently belonged to a giant, and he added that it had been given
to him by a friend who was a builder and contractor, and that the
jaw-bone had been found by one of this friend’s workmen while carrying
out some alterations and excavations at the Bank of England!
Alas, poor Jenkins! to be buried in the “Garden” of the Bank of England
as a sure place of refuge against body-snatchers, and in the end to
have his jaw-bone exhibited as a curio in a dentist’s surgery.
Having shortly sketched the history of the Bank of England from its
inception to the time when it was to be opposed by strong competitive
establishments, we now will briefly examine the development of private
banking up to this period.