In 1821 the Bank of England, after a period of restriction, began to pay off its notes under the value of £5, but the Government allowed the country bankers to continue issuing their small notes until the expiry of the Bank Charter in 1833. In 1826 an Act was passed prohibiting the stamping of notes under £5, and forbidding the circulation after April, 1829, of those then current.
The Bank Act of 1844 confirmed the alterations of 1826 and 1833, and, in addition, made great alterations in connection with the currency. The Issue Department of the Bank of England was to be kept entirely distinct from the Banking Department. Notes, to the extent of £14,000,000, might be issued against the debt owing by the Government to the Bank and against other securities, but coin and bullion must be deposited in the Issue Department against every note issued in excess of that sum.
Notes issued by the Bank of England are, therefore, secured principally by specie, and by the Government debt, which amounts (1902) to £11,015,100; and as every note is a warrant entitling the holder to gold on demand, a Bank of England note is really and truly equivalent to gold. However, under certain possible, if improbable, conditions, the Bank could not fulfil its obligations or promises to pay cash on presentation, for if all its notes in circulation were presented simultaneously there would not be sufficient coin in the Issue Department to meet them; but that is a most unlikely contingency.
Further, these notes are "legal tender" in England. In other words, a debtor can compel his creditor to accept them in discharge of his debt; but nobody is obliged to give out change should the value of the notes tendered exceed the amount of the sum owing. In Scotland and Ireland Bank of England notes are "current" but not "legal" tender. Neither are they by the Bank itself, nor by any of its branches, and sovereigns, though not half-sovereigns or silver, may be demanded in exchange. All notes are convertible at the London Office of the Bank, whose branches, however, are only responsible for those notes issued therefrom.
The Bank still retains the monopoly of issuing notes in London and at a distance not greater than sixty-five miles from the Metropolis. No new bank of issue may be formed; and as the private bankers in London had ceased circulating their notes prior to 1844, the Act practically gave the Bank the monopoly of note issue within the prescribed area. This monopoly alone is of great value; but when we remember that its notes are legal tender in England as well, it is evident that the Bank of England still enjoys a most important concession.
The private bankers of London, and the joint stock banks in London and within sixty-five miles of it, were debarred by the Act of 1844 from issuing notes. Of course the private bankers who still issued notes within the prescribed space retained their privilege, but they were no longer able to circulate as many as they could persuade the public to accept.
Bankers, both joint stock and private, who claimed the privilege of issuing notes were compelled to make a return of their issues for a period of twelve weeks to a given date, when the average amount was ascertained, and the extent of the future issue of each bank settled in accordance therewith. The issues, in other words, were fixed, and they could not exceed the sum authorised without breaking the law, and exposing themselves to a fine equivalent to the average excess during any one month. The Government, anxious to avoid a repetition of the scandals of 1825 and 1836, was evidently determined to limit the note circulations of the country banks, and there seems little doubt that, when the Act was framed, one of its aims was the slow but sure extermination of the country bank note.
Banks which intend giving up their note circulations may compound with the Bank of England, which is then allowed to increase its own issue by two-thirds of the disappearing issues. The Government, however, takes all the profit accruing from such arrangements.
The result of these regulations can be seen in the accretions made from time to time to the Bank's authorised issue of £14,000,000, which has now increased to £18,175,000. The majority of the issues of the private bankers fixed by the Act of 1844 have since lapsed; and the same may be said of the more progressive of the country joint stock banks, which, as their deposits grew, opened branches in London, thereby sacrificing their note circulations to the monopoly of the Bank of England, whose notes are fast driving those of the small country bankers out of circulation. Broadly speaking, it may be said that Bank of England notes are the only notes accepted readily by the English public; but the mere fact of their being legal tender ensures that.