CHAPTER XXII
THE ENGLISH BANKING SYSTEM
Foundation and Growth of the Bank of England
[150]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....
... 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....
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....
We pass on now to the end of the eighteenth century, when the country was plunged into 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.... 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 1, 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....
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....