Bank of England

The Bank of England is the central bank of the United Kingdom. Its development and that of the English banking system has become the model for many other countries.

History

Banking in the modern sense originated in about the middle of the seventeenth century, when merchants took to depositing their balances of coin and bullion with the goldsmiths. The goldsmiths began to offer interest on deposits, since they could re-lend them at higher rates, and the receipts they gave in acknowledgment of the deposits began to circulate as money. And so arose a number of small private firms, all having equal rights, and carrying on the issue of notes unrestricted and free from Government control.

Early history

Charles II relied to a very large extent for his financial needs on loans from the London bankers. He ran heavily into debt and in 1672 suspended Exchequer payments and so the repayment of bankers' advances. The King's credit was ruined by this for several decades. To substitute for these sources of income, William III and his government founded with a Scottish financier William Patterson the 'Governor and Company of the Bank of England', as a minor declaration in the many clauses of the Tunnage Act of 1694. The Bank was founded with a capital of £1,200,000, immediately lent to the Government. In return the Bank could issue notes to the same amount.

The Bank of England went bankrupt after two years of operation, in 1696, and survived because of government granted suspension of payments. The English Crown remained its main customer and granted additional privileges, such as legal protection against the competition of other banks.

The extensions of its charter often "coincided with the grant of additional loans to the State", and the initial limits on the activities of the Bank and the sums it could borrow to the crown were over time repealed. The accumulating privileges gave the Bank of England a position of prestige and influence in the financial world, and smaller banks had difficulties to compete in the same lines of business. In London was the majority of private note issues abandoned by about 1780. The smaller banks began to keep balances with the Bank of England, which was already beginning to acquire the characteristics of a Central Bank.

Later history - a timeline

Year:	Events:
1694	Foundation of the bank and a loan to the government
1696	Suspension of payments
1697	Renewal of charter, loan to the government Limited liability privilege Extension of note issue Monopoly cashier of payments to the government
1709	Renewal of charter and a loan Monopoly on joint stock banking with more than six partners
1713	Renewal of charter and a loan
1742	Renewal of charter, loan to the government without interest
1751	Monopoly administrator of the public debt
1764	Renewal of charter for a fee paid to the government
1781	Renewal of charter and a loan to the government
1793	Legalization of short-term loans to government beyond statutory limitations, loan to the government
1795	Authorization of £5 notes
1797	Authorization of £1 and £2 notes Run on the bank, suspension of payments, a loan to the government
1800	Renewal of charter and a loan to the government
1812–19	Bank of England notes are legal tender, further loans to the government
1821	Resumption of payments in gold after wars with France
1825	Lending to country banks in crisis, re-issue of £1 notes
1826	Joint stock banks permitted outside of London Bank of England authorised to set up branches Prohibited issue of notes lower than £5
1833	Bank of England notes become legal tender for sums above £5
1844	Monopoly of note issue in Great Britain, loan to the government
1914–25	Bank of England notes are legal tender Suspension of payments, loans to the government
1931	Abandonment of the Gold standard
1946	Nationalisation

The Scottish Exception

The Bank of England does not have a monopoly on the issue of banknotes in Scotland (or Northern Ireland). The reason was the union of Scotland and England after the foundation of the bank, and so could the Scottish banks develop separately. The Bank of Scotland was a privately held bank, with a monopoly held from 1695 to 1716, its charter was not renewed. Another charter was granted in 1727 to the Royal Bank of Scotland.

The private banks, however, could operate freely as long as the shareholders accepted unlimited liability for the debts of their banks. Banking was soon dominated by a number of companies of considerable size and financial strength. The system was distinguished by keen competition between the banks and a strict practice of regularly clearing each other's notes (exchanges were made twice a week and balances immediately settled). They quickly adopted branch organisation, and there was, as compared with other countries, a much more rapid growth of deposit banking and development of loan technique. The highly developed Scottish banking, free from legislative interference, has inspired many proponents of free banking.

External links

• Bank of England, home page
• Bank of England on Wikipedia
• British History Online, Statutes of the Realm, Volume 6.
• John H. Clapham, The Bank of England: A History, 1694–1914, (archived)