The Great Events by Famous Historians, Volume 12

by Unknown

%ESTABLISHMENT OF THE BANK OF ENGLAND%

A.D. 1694

JOHN FRANCIS

Not only did the establishment of the Bank of England meet the demands of public exigency at the time; it also created an institution which was to become vitally important in the expanding life of the nation. This custodian of the public money and manager of the public debt of Great Britain is now the largest bank in the world. The only other financial institution that could show an equal record of long stability was the Bank of Amsterdam, which existed from 1609 to 1814.

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.

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 usefullness 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 villany 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.

The people neglected their calling. The legitimate desire of money grew into a fierce and fatal spirit of avarice. The arts so common at a later day were had recourse to. Project begat project, copper was to be turned into brass. Fortunes were to be realized by lotteries. The sea was to yield the treasures it had engulfed. Pearl-fisheries were to pay impossible percentages. "Lottery on lottery," says a writer of the day, "engine on engine, multiplied wonderfully. If any person got considerably by a happy and useful invention, others followed in spite of the patent, and published printed proposals, filling the daily newspapers therewith, thus going on to jostle one another, and abuse the credulity of the people."

Amid the many delusive and impracticable schemes were two important projects which have conferred great benefits on the English people. The first of these was the New River Company, the conception of Sir Hugh Middleton; the second was the corporation of the Bank of England. Nature and the great nations of antiquity suggested the former; the force and pressure of the times demanded the latter. It is from such demands that our chief institutions arise. By precept we may be taught their propriety; by example we may see their advantages. But until the necessity is personally felt they are sure to be neglected; and men wonder at their want of prescience and upbraid their shortsightedness when, with a sudden and sometimes startling success, the proposal they have slighted arises through the energy of another.

William Paterson, one of those men whose capacity is measured by failure or success, was the originator of the new bank; and it is perhaps unfortunate for his fame that no biography exists of this remarkable person. As the projector of the present Bank of Scotland, as the very soul of the celebrated Darien Company, and as the founder of the Bank of England, he deserves notice. A speculator as well as an adventurous man, he proved his belief in the practicability of the Darien scheme by accompanying that unfortunate expedition; and the formation of the Bank of England was the object of his desires and the subject of his thoughts for a long time previous to its establishment.

From that political change which had been so justly termed the "great revolution," to the establishment of the Bank of England, the new Government had been in constant difficulties; and the ministerial mode of procuring money was degrading to a great people. The duties in support of the war waged for liberty and Protestantism were required before they were levied. The city corporation was usually applied to for an advance; interest which varied probably according to the necessity of the borrower rather than to the real value of cash, was paid for the accommodation. The officers of the city went round in their turn to the separate wards, and borrowed in smaller amounts the money they had advanced to the state. Interest and premiums were thus often paid to the extent of 25 and even 30 per cent., in proportion to the exigency of the case, and the trader found his pocket filled at the expense of the public. Mr. Paterson gives a graphic description:

"The erection of this famous bank not only relieved the ministerial managers from their frequent processions into the city, for borrowing of money on the best and nearest public securities, at 10 or 12 per cent. per annum, but likewise gave life and currency to double or treble the value of its capital in other branches of the public credit, and so, under God, became the principal means of the success of the campaign in 1695; as, particularly, in reducing the important fortress of Namur, the first material step toward the peace concluded in 1679."

To remedy this evil the Bank of England was projected; and after much labor, William Paterson, aided by Mr. Michael Godfrey, procured from Government a consideration of the proposal. The King was abroad when the scheme was laid before the council, but the Queen occupied his place. Here considerable opposition occurred. Paterson found it more difficult to procure consent than he anticipated, and all those who feared an invasion of their interests united to stop its progress. The goldsmith foresaw the destruction of his monopoly, and he opposed it from self-interest. The Tory foresaw an easier mode of gaining money for the government he abhorred, with a firmer hold on the people for the monarch he despised, and his antagonism bore all the energy of political partisanship.

The usurer foresaw the destruction of his oppressive extortion, and he resisted it with the vigor of his craft. The rich man foresaw his profits diminished on government contracts, and he vehemently and virtuously opposed it on all public principles. Loud therefore were the outcries and great the exertions of all parties when the bill was first introduced to the House of Commons. But outcries are vain and exertions futile in opposition to a dominant and powerful party. A majority had been secured for the measure; and they who opposed its progress covered their defeat with vehement denunciations and vague prophecies. The prophets are in their graves, and their predictions only survive in the history of that establishment the downfall of which they proclaimed.

"The scheme of a national bank," says Smollett, "had been recommended to the ministry for the credit and security of the Government and the increase of trade and circulation. William Paterson was author of that which was carried into execution. When it was properly digested in the cabinet, and a majority in Parliament secured, it was introduced into the House of Commons. The supporters said it would rescue the nation out of the hands of extortioners; lower interest; raise the value of land; revive public credit; extend circulation; improve commerce; facilitate the annual supplies; and connect the people more closely with Government. The project was violently opposed by a strong party, who affirmed that it would become a monopoly, and engross the whole of the kingdom; that it might be employed to the worst purposes of arbitrary power; that it would weaken commerce by tempting people to withdraw their money from trade; that brokers and jobbers would prey on their fellow-creatures; encourage fraud and gambling; and corrupt the morals of the nation."

Previous governments had raised money with comparative ease because they were legitimate. That of William was felt to be precarious. It was feared by the money-lender that a similar convulsion to the one which had borne him so easily to the throne of a great nation might waft him back to the shores of that Holland he so dearly loved. Thus the very circumstances which made supplies necessary also made them scarce.

In addition to these things his person was unpopular. His phlegmatic Dutch habits contrasted unfavorably with those of the graceful Stuarts, whose evil qualities were forgotten in the remembrance of their showy characteristics. Neither his Dutch followers nor his Dutch manners were regarded with favor; and had it not been for his eminently kingly capacity, these things would have proved as dangerous to the throne as they tended to make the sovereign unpopular. In a pamphlet published a few years after the establishment of the new corporation is the following vivid picture of this monarch's government:

"In spite of the most glorious Prince and most vigilant General the world has ever seen, yet the enemy gained upon us every year; the funds were run down, the credit jobbed away in Change Alley, the King and his troops devoured by mechanics, and sold to usury, tallies lay bundled up like Bath fagots in the hands of brokers and stock-jobbers; the Parliament gave taxes, levied funds, but the loans were at the mercy of those men (the jobbers); and they showed their mercy, indeed, by devouring the King and the army, the Parliament, and indeed the whole nation; bringing their great Prince sometimes to that exigence through inexpressible extortions that were put upon him, that he has even gone into the fields without his equipage, nay even without his army; the regiments have been unclothed when the King had been in the field, and the willing, brave English spirits, eager to honor their country, and follow such a King, have marched even to battle without either stockings or shoes, while his servants have been every day working in Exchange Alley to get his men money of the stock-jobbers, even after all the horrible demands of discount have been allowed; and at last, scarce 50 per cent. of the money granted by Parliament has come into the hands of the Exchequer, and that late, too late for service, and by driblets, till the King has been tired with the delay."

This is a strange picture; beating even Mr. Paterson's account of the "processions in the city," and adds another convincing proof of the necessity which then existed for some establishment, capable of advancing money at a reasonable rate, on the security of Parliamentary grants.

The scheme proposed by William Paterson was too important not to meet with many enemies, and it appears from a pamphlet by Mr. Godfrey, the first deputy-governor, that "some pretended to dislike the bank only for fear it should disappoint their majesties of the supplies proposed to be raised." That "all the several companies of oppressors are strangely alarmed, and exclaim at the bank, and seemed to have joined in a confederacy against it." That "extortion, usury, and oppression were never so attacked as they are likely to be by the bank." That "others pretend the bank will join with the prince to make him absolute. That the concern have too good a bargain and that it would be prejudicial to trade." In Bishop Burners History of His Own Times we read an additional evidence of its necessity:

"It was visible that all the enemies of the Government set themselves against it with such a vehemence of zeal that this alone convinced all people that they saw the strength that our affairs would receive from it. I heard the Dutch often reckon the great advantage they had had from their banks, and they concluded that as long as England remained jealous of her Government, a bank could never be settled among us, nor gain credit among us to support itself, and upon that they judged that the superiority in trade must still be on their side."

All these varied interests were vainly exerted to prevent the bill from receiving the royal sanction; and the Bank of England, founded on the same principles which guarded the banks of Venice and Genoa, was incorporated by royal charter, dated July 27, 1694. From Mr. Gilbart's History and Principles of Banking we present the following brief analysis of this important act:

"The Act of Parliament by which the Bank was established is entitled 'An Act for granting to their majesties several duties upon tonnage of ships and vessels, and upon beer, ale, and other liquors, for securing certain recompenses and advantages in the said Act mentioned to such persons as shall voluntarily advance the sum of fifteen hundred thousand pounds toward carrying on the war with France.' After a variety of enactments relative to the duties upon tonnage of ships and vessels, and upon beer, ale, and other liquors, the Act authorizes the raising of 1,200,000 pounds by voluntary subscription, the subscribers to be formed into a corporation and be styled 'The Governor and Company of the Bank of England.'

"The sum of 300,000 pounds was also to be raised by subscription, and the contributors to receive instead annuities for one, two, or three lives. Toward the 1,200,000 pounds no one person was to subscribe more than 10,000 pounds before the first day of July, next ensuing, nor at any time more than 20,000 pounds. The Corporation were to lend their whole capital to the Government, for which they were to receive interest at the rate of 8 per cent. per annum, and 4000 pounds per annum for management; being 100,000 pounds per annum on the whole. The Corporation were not allowed to borrow or owe more than the amount of their capital, and if they did so the individual members became liable to the creditors in proportion to the amount of their stock. The Corporation were not to trade in any 'goods, wares, or merchandise whatever, but they were allowed to deal in bills of Exchange, gold or silver bullion, and to sell any goods, wares, or merchandise upon which they had advanced money, and which had not been redeemed within three months after the time agreed upon.' The whole of the subscription was filled in a few days; 25 per cent. paid down; and, as we have seen, a charter was issued on July 27, 1694, of which the following are the most important points:

"That the management and government of the corporation be admitted to the governor, deputy-governor, and twenty-four directors, who shall be elected between March 25th and April 25th of each year, from among the members of the company, duly qualified.

"That no dividend shall at any time be made by the said governor and company save only out of the interest, profit, or produce arising out of the said capital, stock, or fund, or by such dealing as is allowed by act of Parliament.

"They must be natural-born subjects of England, or naturalized subjects; they shall have in their own name and for their own use, severally, viz., the governor at least 4000 pounds, the deputy-governor 3000 pounds, and each director 2000 pounds of the capital stock of the said corporation.

"That thirteen or more of the said governors or directors (of which the governor or deputy-governor shall be always one) shall constitute a court of directors for the management of the affairs of the company, and for the appointment of all agents and servants which may be necessary, paying them such salaries as they may consider reasonable.

"Every elector must have, in his own name and for his own use, 500 pounds or more capital stock, and can only give one vote; he must, if required by any member present, take the oath of stock, or the declaration of stock if it be one of those people called Quakers.

"Four general courts to be held in every year in the months of September, December, April, and July. A general court may be summoned at any time, upon the requisition of nine proprietors duly qualified as electors.

"The majority of electors in general courts have the power to make and constitute by-laws and ordinances for the government of the corporation, provided that such by-laws and ordinances be not repugnant to the laws of the kingdom, and be confirmed and approved according to the statutes in such case made and provided."

When the payment was completed it was handed into the exchequer, and the bank procured from other quarters the funds which it required. It employed the same means which the bankers had done at the Exchange, with this difference, that the latter traded with personal property, while the bank traded with the deposits of their customers. It was from the circulation of a capital so formed that the bank derived its profits. It is evident, however, from the pamphlet of the first deputy-governor, that at this period they allowed interest to their depositors; and another writer, D'Avenant, makes it a subject of complaint: "It would be for the general good of trade if the bank were restrained from allowing interest for running cash; for the ease of having 3 and 4 per cent. without trouble must be a continual bar to industry."

First in Mercers' Hall, where they remained but a few months, and afterward in Grocers' Hall, since razed for the erection of a more stately structure, the Bank of England conducted its operations. Here, in one room, with almost primitive simplicity were gathered all who performed the duties of the establishment. "I looked into the great hall where the bank is kept," says the graceful essayist of the day, "and was not a little pleased to see the directors, secretaries, and clerks, with all the other members of that wealthy Corporation, ranged in their several stations according to the parts they hold in that just and regular economy." The secretaries and clerks altogether numbered but fifty-four, while their united salaries did not exceed four thousand three hundred fifty pounds. But the picture is a pleasant one, and though so much unlike present usages it is doubtful whether our forefathers did not derive more benefit from intimate association with and kindly feelings toward their inferiors than their descendants receive from the broad line of demarcation adopted at the present day.

The effect of the new corporation was almost immediately experienced. On August 8th, in the year of its establishment, the rate of discount on foreign bills was 6 per cent.; although this was the highest legal interest, yet much higher rates had been previously demanded. The name of William Paterson was not long upon the list of directors. The bank was established in 1694, and for that year only was its founder among those who managed its proceedings. The facts which led to his departure from the honorable post of director are difficult to collect; but it is not at all improbable that the character of Paterson was too speculative for those with whom he was joined in companionship. Sir John Dalrymple remarks, "The persons to whom he applied made use of his ideas, took the honor to themselves, were civil to him awhile, and neglected him afterward." Another writer says, "The friendless Scot was intrigued out of his post and out of the honors he had earned." These assertions must be received with caution; accusations against a great body are easily made; and it is rarely consistent with the dignity of the latter to reply; they are received as truths either because people are too idle to examine or because there is no opportunity of investigating them.