Bank of England

The Bank of England was initially a “private enterprise” created and funded through private subscription. The Bank of England did not become a British public institution until 1946, after the end of World War II. As one of the earliest Companies and one of the few to have survived the centuries, it is difficult to imagine it being managed by private stockholders today. Ironically, London’s goldsmiths were the first to develop something approximating a banknote. A run on the Bank endangered its survival, forcing it to rely on rescue from the House of Rothschilds, which sailed into Falmouth and deposited Gold Sovereigns the same day. It appears that the history of the Bank of England has not been as smooth and uncomplicated as one might expect.

How did the Bank become the protector of a nation’s riches and a pillar of British economic management? Discover through this condensed chronology the events that led to the Bank of England as it exists.

The Bank of England was created in 1694 in the 17th century.

In 1694, following the Glorious Revolution of 1688, the Royal Charter established the Bank. Following the revolution, William III of Orange and Queen Mary rose to the throne. The Bank was established in 1694, the same year Queen Mary died, but her husband’s costly wars left the country’s finances in shambles. The public coffers were severely depleted and required funding. Among William’s follies were the Jacobite Wars (Battle of the Boyne 1690 and war with France 1689.) Several plans were suggested for resolving this problematic issue, but William Patterson’s proposals were chosen.

The Bank of England was one of Patterson’s better ideas; he also attempted to establish a Scottish colony or empire in Panama. However, his suggestion to finance government debt through the private Subscription of individual shareholders was revolutionary for the time. In ‘A Brief Account of the Intended Bank of England,’ he outlined his thoughts.

The theories required political endorsement, provided by the new Chancellor Charles Montagu, a distinguished scholar who studied at Trinity College Cambridge and forged a lasting relationship with Isaac Newton. Montague worked swiftly to implement Patterson’s proposals, which had been drafted roughly three years prior. The procedure is detailed in the modern House of Commons Article establishing the Bank: -1694. Volume 5 of The History and Proceedings of the House of Commons, 1713-1714. 74. London: Chandler, 1742 British History Online, web date: March 25, 2015

In exchange for the capital investment that would fund the government debt, their company would be formed by the Royal Charter and become the sole limited-liability corporation permitted to issue Bank Notes and trade in Bonds that have been re-loaned against the government debt. These rights allowed the Bank of England to enjoy a monopoly at the time; nevertheless, within a few years, the Bank would be challenged by the formation of the doomed South Seas Company, which would compete with it. But for the time being, the £1.2 million Subscription was raised in just 12 days, and half of it was pledged to be used to rebuild the navy and begin to reestablish Britain’s Empire with a regained naval force. In 1691, Charles Montagu became a member of Parliament. As a new Chancellor, his contribution to the success of the first Subscription was substantial and impressive. Imagine a large bank being formed today on the back of a newly elected member of Parliament in less than two weeks; unlikely.

However, what were these Bank Notes, and where did they originate?

The ‘Goldsmids’ or Goldsmiths regulated the supply and storage of Gold. They had historically utilized a system of notes to record the deposits they kept and their worth as, essentially, receipts that their customers could keep. Over time, they had developed an informal market through tradition, and these notes functioned as virtual currency. Examples of the combining of the jobs of Goldsmith and Banker can be examined in the British Museum’s collection of Goldsmith’s notes from before and after the establishment of the Bank of England.

With the necessity to pay the national debt, there were a variety of proposed solutions. Still, the key to the success of the Bank as a subscription was granting it a formal monopoly on the issuance of what would become known as Bank Notes. Since the 14th century, the Goldsmith Company has operated in numerous incarnations. It remains today as the Worshipful Company of Goldsmith in the city of London, as well as Goldsmith College, which was founded under its original generous patronage and is now a component of the University of London. Gold is, of course, still vital to the effective management of any economy, but at the time of the Bank of England’s formation, it was its fundamental foundation. Montagu’s associate, Sir Isaac Newton (Master of the Royal Mint), would play an intriguing role in the Gold Standard’s genesis. The Gold Standard would determine the relative worth of international currency exchange for generations to come, as described in our historical description.

The evolution of the Bank and the establishment of British Banking

Parliament passed the Royal Charter in 1694. The subscriptions totaled £1.2 million, which, in terms of current value, would be worth considerably more now; this was a pivotal time in the history of the British economy and had a big impact on global markets. In addition to accepting private deposits, the Bank of England purchased a substantial amount of government stock and issued notes on the security and ownership of that debt.

This was the beginning of managing debt as an intangible asset represented by, for example, a Banker’s note or bond that lacked inherent worth unless converted into a tangible item of value such as Gold. A “Banker’s note” would retain its value and reflect a pledge to pay the equivalent value in Gold upon demand if demanded under specific agreed-upon conditions. Nonetheless, the substance or paper it was written on was not where the value was realized; rather, it was represented by the Gold value equivalent.

The “Banknote” emerged and was modeled by the receipts and notes utilized by goldsmiths. Simultaneously with the opening of the Bank, the concepts of the National Debt and paper-based currency emerged. The Government had to spend more than it brought in through taxation, a regular situation. Is this when the nation’s finances begin to be controlled separately by the monarch.

The Bank of England had been formed by Subscription as a private, non-national corporation, licensed and authorized by the Royal Charter, but it was not alone and had to compete for its market share. Within just three years of opening its doors, there would also be complications brought on by the South Seas Company debacle, and all of this occurred concurrently with the East India Company, which operated as an authorized Company State in its operations on the Indian markets and continued to generate substantial profits. Developing government economic policy and determining the success or failure of linked organizations, enterprises, and institutions in London, Britain, and worldwide would rely heavily on the Bank.

What occurred when in the Bank of England’s history?

Below is a timeline and chronology of events in the history of the Bank of England. We will periodically update, fix, add, and modify as we discover new connections and resources to offer, but for now, here are the current order and remarks.

The Bank of England’s beginnings in the 17th century

From its establishment in 1694, near the end of the century, the following events occurred in the early days:

Recoinage in 1696 lessened the demand for small denomination banknotes. Thus it was determined that none would be issued for amounts less than £50. Since the typical salary during this period was less than £20 per year, most individuals never handled banknotes.

Parliament prohibited the formation of additional Joint Stock firms in 1697. This was a purposeful anticompetitive strategy that acted as a barrier to market access for would-be competitors of the South Seas Company, whose primary competitor was the Bank of England. A Royal Charter is required by law for an organization to be legally recognized as a Company. The unfortunate conditions resulted from the South Sea Company’s misfortunes and the artificial inflation of its stock price. At the time, the Bank of England, itself a private organization (Company), was possibly in competition with the South Seas Company.

It ultimately resulted in the Bubble Act as well. Consider our legal, business, and organization topics to gain a broader understanding of these events.

18th century founding of the Bank of England

The 18th century witnessed the expansion of banking throughout Europe; the Bank of England became the largest institution in Britain but was not yet a part of the formal Government. London’s private banks expanded and fueled the country’s business and economic expansion. Long-term, the Bank of England was beginning to solidify its central role in the British economy despite the South Seas fiasco.

1708 Bank of England awarded the Issue Bank Monopoly Goldsmiths initially created notes and receipts to retain deposits for their clients, which they distributed as “virtual money.”

Acts enacted in 1708 and 1709 prohibited corporations or partnerships with more than six members from establishing banks or issuing currency. The prohibition did not apply to the vast majority of provincial bankers who were individuals or small family businesses.

1717 Gold Standard was formed “after the master of the mint, Sir Isaac Newton, overvalued the guinea in terms of silver, and formally embraced the gold standard in 1819.” surprisingly, for a man with such obvious intelligence, the guinea was overvalued in terms of silver. Not until 1816 was officially adopted by the Bank of England in the United Kingdom. As indicated above, Newton was a close acquaintance of Montagu, the Bank’s founding Chancellor.

In 1725, the Bank issued partially printed notes to be completed in the manuscript. The £ symbol and the first digit were printed, while the other numbers, the payee’s name, the cashier’s signature, the date, and the number were handwritten. Notes could be for non-round quantities, but the vast majority were for even amounts.

In 1745, banknotes with values ranging from £20 to £1,000 were issued.

Due to gold shortages created by the Seven Years’ War, the Bank of England issued its first £10 note in 1759. In times of economic distress, smaller bills were required.

Particularly for the British economy, the 1780s were a time of prosperous growth.

1793 The first £5 banknotes were created during the beginning of the French Revolutionary War.

This considerably liberalized the market for money and finance as a company in its own right.

1797-1821 Restriction Period, when a series of runs on the Bank, prompted by the unpredictability of the war, depleted its bullion reserve to the point where it was compelled to cease exchanging Gold for its notes. Instead, it produced notes of £1 and £2.

The nineteenth century and the Bank of England

Continue of the 1800-1821 Restriction Period: the harsh economic situation after the 18th century lasted into the new century. Even after Britain was victorious, the French Revolutionary and Napoleonic Wars took and continued to take a financial toll on society. This continues during the first 21 years of the 21st century. And this is reflected in the extended duration of the “Restriction Period.”

Rothschild gave coinage and local currency to support Wellington’s men on the battlefield in 1814; the Bank of England could not compete at this time in history. Their multinational network was unparalleled and may have been the earliest British PFI (Private Finance Initiative). Rothschilds are once again able to aid national governments and provide resources that the National Bank was unable to. The Rothschild was created in Frankfurt by a single man who had the vision to send his sons to grow and expand the family firm across the major markets, broadening its reach and decreasing its reliance on a single market.

This level of entrepreneurship was astonishing, given that this family firm not only rivals the power of governments but also surpasses the capacity of the Bank of England! Some of the Rothschilds’ involvement throughout history is more fiction than fact, but there was a connection. The family archives, however, do not support the absurd notion that Rothschilds were with Wellington.

Introduced in 1816, the gold standard remained until 1914, when World War I broke out. Based on its relative worth in Gold, the Pound Sterling was valued or “pegged” against other currencies. Banks should be able to exchange all issued currency for its Gold Standard equivalent on demand.

In 1821, the convertibility of Banks Notes was reinstated. The so-called Restriction Period lasted until 1821, following which gold sovereigns replaced the £1 and £2. The Restriction Period caused Richard Brinsley Sheridan, an Irish writer, and politician, to refer to the Bank as “… an elderly lady in the City” and James Gillray, a cartoonist, to refer to the Old Lady of Threadneedle Street. This name has endured since then.

1825 Bank of England Collapse and House of Rothschild Rescue The Bank of England was down to its last 100,000 sovereigns due to a reserve run. Rothschilds landed a ship in Falmouth and injected 150,000 sovereigns into the Bank of England in a single day, just escaping the suspension of payments and withdrawals. The name of the Rothschilds family and its enterprises would appear frequently and intertwine with the Bank’s history at several crucial moments in British Government history when the Bank of England lacked the capacity or speed to aid its Government. Incomprehensible now, the power and significance of private capital in the nineteenth century and the foundations of the financial markets we rely on frequently exceeded that of the governments and kings it served.

The 1826 Country Bankers’ Act permitted note-issuing joint-stock banks with more than six partners, but not within 65 miles of London. The Act also permitted the Bank of England to open branches in significant provincial capitals, expanding its notes’ availability.

The 1825-1826 Bank Charter Act eventually permitted the formation of numerous new Joint Stock Companies without needing a Royal Charter. These flourished initially outside of London but later within its borders.

English Provincial Banks that were Joint Stock Companies were permitted to issue notes under the supervision of the Bank of England beginning in 1826. This occurred after the failure of numerous country-based banks.

1833, the Bank Charter Act 1833, and the Bank’s ability to determine interest rates were liberalized, making Bank of England notes lawful tender. The Bank’s notes were made legal tender for any amounts over £5 in England and Wales so that, in the event of a crisis, the public would continue to accept the Bank’s notes, and its bullion reserves would be protected.

Further banking crises in 1836 and 1839 prompted Robert Peel to restrict the issuance of bank notes to the Bank of England to create a more stable market and money supply.

1844, Bank Charter Act 1844, this Act concluded the discussion on the required ratio of Gold reserves; in effect, this remains one of the Bank’s responsibilities regarding the notes it produces and circulates on the market. In 1844, it was decided that the Gold retained must surpass the number of notes issued. No longer could new banks issue their currency.

1846 Barings Banking Crisis preceding and throughout the crisis (when the Barings found themselves overextended in Argentina, which suddenly stopped making repayments.) The common problem was that the Government and the Bank of England had forged a covert deal to cover half of Barings’ losses to stabilize the market.

The Bank of England was crucial in preventing a total market collapse. The Barings events did, however, limit British overseas investment until confidence began to return and the promise of harnessing South African resources began to reveal its full potential to generate spectacular profits. After the Barings crisis, the Bank assumed a greater role in preserving the value of the British currency relative to the Gold Standard.

First fully printed notes in 1853 In 1853, the first fully printed banknotes were introduced, freeing cashiers of the need to fill in the payee’s name and sign each note individually. 1857 and 1866. Additional Banking Crises Similar crises occurred in 1857 and 1866, and again, requirements for gold reserve levels had to be suspended to avert the Bank’s collapse. Throughout the 19th century, a succession of banking crises persisted. In deteriorating economic conditions, the ratio of gold deposits maintained and retained to notes issued was frequently loosened. The Bank Governor devised a rescue effort in the shape of a guaranteed fund for banks in the Square Mile, and more than £17 million was pledged, the majority of which came from now-powerful joint-stock banks.

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