CHAPTER II

FOUNDATION AND GROWTH OF THE BANK OF ENGLAND

In tracing the history of our financial system we now come to the important event of the establishment of the Bank of England.

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. His scheme, though well received in official circles, produced very great opposition from many classes of the public, who thought they would be prejudiced by such an institution.

The goldsmiths thought they saw in it the destruction of their business, the money-lenders a reduction in the rates of interest obtainable, certain merchants a reduction of their profits on Government contracts, while the political opponents of the Government and the king saw that the scheme, if efficiently carried out, would naturally strengthen the former and give the latter a firmer position than he occupied at that time; and all these interested parties with one accord joined forces and condemned the scheme.

But in spite of all opposition 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.

Such in brief was the foundation of the Bank of England, and though its establishment quickly had a beneficial effect on the community at large, in curtailing the ruling rates of interest, yet its early years were marked by great trouble and many vicissitudes. Certain persons who had opposed its establishment from personal motives saw some of their worst fears being realised in the reduction of their profits, and they were not slow to take advantage of every opportunity which presented itself to throw obstacles in the path of their young though powerful rival, and to unite in efforts to thwart its progress.

With a Government always wanting more financial help, in season and out of season, with debased currency, and with enemies on every side, the position of the directors of the Bank was no enviable one; and it was only by great energy, united effort, and perseverance that they were able to keep their heads above water, and struggle on until at last they found themselves on safer and firmer ground.

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.”

In spite of its many embarrassments, the following extract from the _London Magazine_ of 1737 shows how well the Bank of England had come to be thought of by that time:—

“There certainly never was a body of men that contributed more to the public safety than the Bank of England. This flourishing and opulent company have, upon every emergency, always cheerfully and readily supplied the necessities of the nation, so that there never have been any difficulties—any embarrassments—any delays in raising the money which has been granted by Parliament for the service of the public; and it may very truly be said that they have, in very many important conjunctures, relieved the nation out of the greatest difficulties, if not absolutely saved it from ruin.”

We pass on now to the end of the eighteenth century, when the country was plunged in 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. On the following day this Order was made public, and the Bank issued the following notice:—

“BANK OF ENGLAND, _February 27th, 1797_.

“In consequence of an order of His Majesty’s Privy Council, notified to the Bank last night, a copy of which is hereunto annexed, the governor, deputy-governor, and directors of the Bank of England think it their duty to inform the proprietors of the bank stock, as well as the public at large, that the general concerns of the Bank are in the most affluent and prosperous situation, and such as to preclude every doubt as to the security of its notes. The directors mean to continue their usual discounts for the accommodation of the commercial interest, paying the amount in bank-notes, and the dividend warrants will be paid in the same manner.”

This suspension of cash payments was a very drastic measure to take; but the public, recognising the difficulties of the situation, and appreciating the means which were being taken for the general safety, at once fell in with the spirit of the Order, and a meeting of merchants and bankers was held and passed the following resolution, which received very general support:—

“That we, the undersigned, being highly sensible how necessary the preservation of public credit is at this time, do most readily declare that we will not refuse to receive bank-notes in payment of any sum of money to be paid to us, and we will use our utmost endeavours to make all our payments in the same manner.”

An Act was passed in the following May, confirming the action of the Privy Council, but authorising the Bank to pay out sums under twenty shillings in cash, and also allowing certain bankers to have a stated amount of cash. This Act restricted the payment of cash for a period of fifty-two days only, but before it expired a further Act was passed extending the period of restriction, and subsequently other Acts were passed greatly prolonging the period; and 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 1st, 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.

The year 1824 was notable for a very great increase in the number of joint-stock companies which were promoted or suggested, and also of loans to foreign countries; and a period of intense excitement and speculation ensued. This was followed by the inevitable crisis, which developed into a panic at the end of 1825, when a large number of London and country bankers had to stop payment. The reserve of the Bank was reduced to a merely nominal figure, and the Bank authorities themselves suggested that they should again be “restricted” as to payments; but the suggestion was firmly resisted by the Government. Fortunately, at the lucky moment, an old box which had been stored away was remembered. It contained a large quantity of £1 notes, and these the Bank at once commenced to issue. This issue had very quick and beneficial results. The notes were readily received by the public in exchange for the notes of private bankers, the demand for bullion ceased; and Mr. Harman, giving his evidence before a parliamentary committee inquiring into the causes of the panic, stated it was his opinion that this issue of small notes “saved the credit of the country.”

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.

When the Bank of England first commenced business in 1694, it was located in the Hall of the Grocers’ Company, in which building it continued to conduct its operations until the year 1732. A slight dispute then arising with the Grocers’ Company as to a renewal of the lease of their hall, it was decided by the authorities of the Bank to acquire a building of their own. Accordingly premises were obtained in Threadneedle Street upon a portion of the present site, and Lawson in his _History of the Bank of England_ gives the following details as to the same:—

“The original extent of the Bank comprehends the site of the house and garden belonging to Sir J. Houblon, one of the first directors. It was a comparatively small building, invisible from the street, and surrounded by other buildings, one being the church of St. Christopher le Stocks, and the others consisting of five inns and twenty private houses. As the business and importance of the Bank grew, the surrounding premises were acquired from time to time and demolished, and the present building was gradually erected. Although the church of St. Christopher shared a similar fate with the surrounding buildings, the churchyard was preserved, and now forms what is known as the ‘Garden’ of the Bank.”

Lawson states that one of the clerks of the Bank, of the name of Jenkins, was buried in this consecrated ground. The cause of this interment in such a place arose out of a fear, as expressed by his relatives, that in consequence of his singular height (he was about seven feet tall), his body would be exhumed by body-snatchers if buried elsewhere. The sequel to this episode is within the writer’s personal knowledge. Having to pay a visit to a dentist some few years ago, he was shown, as a curiosity, an enormous human lower jaw-bone with a full set of perfect teeth. Judging from its size, the dentist said that it had evidently belonged to a giant, and he added that it had been given to him by a friend who was a builder and contractor, and that the jaw-bone had been found by one of this friend’s workmen while carrying out some alterations and excavations at the Bank of England!

Alas, poor Jenkins! to be buried in the “Garden” of the Bank of England as a sure place of refuge against body-snatchers, and in the end to have his jaw-bone exhibited as a curio in a dentist’s surgery.

Having shortly sketched the history of the Bank of England from its inception to the time when it was to be opposed by strong competitive establishments, we now will briefly examine the development of private banking up to this period.