CHAPTER IV.

FIRST CENTURY OF THE BANK OF ENGLAND.

The Economic and Financial Conditions Out of Which the Bank Grew-Early Difficulties and the First Suspension of Specie Payments-The Loans of the Napoleonic Wars and the Restriction of 1797-Pitt's Enormous Drafts upon the Bank.

THE

HE Bank of England, like many of the Continental banks, had its origin in the needs of the State. The institution which resulted has been several times the victim of the monetary necessities of the government, but has not been dragged quite so persistently as the banks of Italy, Austria, and Russia through the mire of depreciated money and forced legal tender. The Bank of England has come to enjoy, by a series of changes in the law, the substantial monopoly of note issue in England and Wales, and has proved one of the strongest banking institutions of the world. The note circulation, since the Act of 1844, is based wholly upon securities and deposits of coin and bullion. The rigidity of the English system, by which expansion is prevented to meet changing conditions of business, has received the condemnation of most students of political economy, but this has not kept it from becoming to some extent the model of national banks of later foundation on the Continent of Europe. The defects of the English system of note issues are those which are most apparent in a country where deposit banking is in its infancy. They are less obvious and oppressive in England than they would otherwise be because of her small area, the wide use of credit instruments and the closely-knit commercial relations of her people.

The creation of the Bank of England is involved with both the political and fiscal history of the close of the seventeenth century. England was behind Italy and Holland in the development of the mechanism of modern commerce, and the proposition to establish a banking system was sharply resisted by Gerard Malynes, who published in 1601 a Treatise of the Canker of England's Commonwealth. Malynes described the Continental method of banking with a fairness. and precision which enable its leading features to be readily understood, in spite of his opinion that payments by the banks by transfers upon their books were "almost or rather altogether imaginative or figurative." English merchants. deposited their cash for a time in London Tower, but £120,ooo was seized by Charles I., in 1640, and only repaid after violent protests and long delay.' The goldsmiths then became the bankers for the community and paid interest for the money left in their custody. There was much opposition to the new system at first and, strange to say, one of the last to adhere to the old method of keeping his cash in a strong box at home was Sir Dudley North, one of the most. progressive thinkers on political economy of his time. As Macaulay graphically recounts North's experience, "He found that he could not go on Change without being followed around the piazza by goldsmiths, who, with low bows, begged to have the honor of serving him. He lost his. temper when his friends asked where he kept his cash. 'Where should I keep it,' he asked, but in my own house?''''

While commerce was coming to feel more and more the need of a banking institution, the government was also feeling the necessity of some method of raising money beyond the precarious plan of sending agents to individual merchants to see what they would lend. The historic legend that King James I. attempted out of a spirit of pure wantonness to levy excessive and unusual taxes upon the people of

MacLeod, Theory and Practice of Banking, I., 435.

England is not fully borne out by the facts. The method of taxation which he sought to introduce was simply a phase of the transition from feudal to modern methods of carrying on public affairs. As a careful student of the economic history of England puts it:

According to ancient usage the King had been able to live of his own, and had recourse to Parliament in emergencies. The chief problem of the seventeenth century was to find a source of revenue which would supply a regular income, that might adequately correspond to the increased responsibilities of government in these more modern times. The first attempt to do this was in the Great Contract, proposed to the Parliament in 1610; by this James proposed to relinquish all the occasional payments from feudal tenures, in return for a regular income of £200,000 to be derived from parliamentary supplies.

As this bargain broke down, James was a considerable sufferer; Charles I., to whom Tunnage and Poundage were not voted for life, was left in a position of direct dependence on parliamentary grants, and he did not conceal his resentment. During both of these reigns every effort was made to secure supplies from extra-parliamentary sources; while the Commons, who were eagerly anxious to assert their position and exercise a real control over the foreign as well as the domestic policy of the realm, were always on the alert to thwart these attempts. 1

The parliamentary party succeeded in organizing a system of taxation by means of customs duties, monthly levies upon real estate and excises on internal trade, which continued in full force after the restoration of the Stuarts. These taxes laid the foundation of the modern method of defraying the expenses of government, but they were inadequate for many extra expenses and for carrying on the wars in which Charles II. and William III. found themselves involved. Charles II. turned for assistance to the goldsmiths. But his rapacity soon outran his borrowing capacity, and he gave a violent shock to credit by a proclamation of January 2, 1672, refusing payment out of the Exchequer of money advanced and sequestrating £1,328,526 to his own use. The money,

although lent by the goldsmiths to the King, was the prop1 Cunningham, II., 215.

erty of some 10,000 depositors and its loss spread ruin and suffering throughout London. A long course of litigation ensued, which finally ended in the reign of William by the consolidation of the indebtedness with other portions of the permanent national debt.' This conduct on the part of the Stuart King made the people and the bankers cautious about loaning to the government, and William III. was driven to desperate expedients to obtain revenue to carry on the war with France. A poll tax was imposed, stamp duties were levied which have never been entirely repealed, and enormous prizes, in the form of annuities on the tontine plan, were offered to those who would lend to the State.

A plan was presented to the Committee of the House of Commons, while they were considering the claims of the goldsmiths in the autumn of 1691, which contained the germs of the organization of the Bank of England. William Paterson, himself an obscure Scotchman, but supported by several wealthy London merchants, offered to advance £1,000,000 to the government on condition of receiving £65,000 a year as interest and the costs of management and authority to issue bills which should be legal tender. The government refused to give forced currency to the bills and the matter fell through until 1694. Montague, the ingenious and enterprising minister of William, then sent for Paterson and requested him to organize a plan. The new project contemplated a loan of £2,000,000 to the government at seven per cent., but the ministry, who were accustomed to discounts and commissions of forty per cent. on short loans, could not be made to believe that a loan with no fixed date of maturity could be floated at such a low rate. The government turned to other plans, but Paterson persevered and presently obtained the help of Mr. Michael Godfrey, who carried the scheme to a successful conclusion. It was put in definite shape by Montague and was saddled upon the Ways and Means bill (Statutes 1694, ch. 20), in a form which would be characterized in modern legislation as "a rider."

1 MacLeod, Theory and Practice of Banking, I., 441-44.

"The Governor and Company of the Bank of England" was the official designation of the new bank, but it was called by its enemies the Tonnage Bank, because the bill levied certain tonnage dues as well as customs and other taxes. The necessity of money was so great that the bill passed without a division in the Commons, and in a very thin house. There was some opposition in the House of Lords, and much criticism of the action of the Commons in attaching the provisions for the bank to a tax bill. It was already May, according to the new style, when the final struggle occurred, and the debate of the last day continued from nine in the morning till six in the evening. It was proposed to strike out all the clauses relating to the bank, but its defenders suggested that this would be to invite a contest with the Commons over the old political issue, whether the Lords had the right to amend a money bill. This argument prevailed, the amendment was rejected, thirtyone votes in its favor to forty-three in the negative, and a few hours later the bill' received the royal assent and Parliament was prorogued.

The new bank was to be organized upon the loan by the stockholders of £1,200,000 ($6,000,000) to the government, and was authorized to issue notes, to deal in bullion and commercial bills and to make advances on merchandise. Subscriptions were opened on Thursday, June 21st, in the Mercer's Chapel, and one-quarter of the capital was subscribed the first day. Half was subscribed within three days, and by Monday noon, July 2d, the entire subscription was completed. Among the subscribers were Sir John Houblon, the first Governor, who was descended from a Flemish refugee;

The date was April 24, 1694, old style; May 4, new style. The dates here given are from the contemporary records and are old style.

The value of the English pound sterling is so generally known that I have not thought it necessary in this and the following chapter to give the equivalents in United States money for the sums named. The value of the pound sterling as reported by the Director of the Mint of the United States is $4.8665, but for the purpose of computing round figures is usually taken at $5.00.