BANK OF ENGLAND IN 17TH CENT.   Term Paper ID:19802 Click to get this paper

Essay Subject: Founding, purposes, development, politics, credibility, background, goldsmith banking, operations, effect on economy as institution geared to its time.... More...

57 Pages / 12825 Words 25 sources, 85 Citations, TURABIAN Format $100.00 Return to List of Papers

Paper Abstract: Founding, purposes, development, politics, credibility, background, goldsmith banking, operations, effect on economy as institution geared to its time. Paper Introduction: On May 4, 1696, the Bank of England was caught in the grip of its first crisis. The Bank had based its operation on the standard confidence trick which powers modern financial institutions: lending out the money that had been deposited therein and keeping only a small cash reserve on hand to meet the needs of those wishing to make withdrawals. Such a system works perfectly well when public confidence in the state of the bank, the economy, and the nation as a whole is strong. But by 1696, the English public felt no such sense of security. England was irrevocably locked in a costly and seemingly unwinnable struggle against the France of Louis XIV, the most powerful country in Europe. The depletion of the currency, so long a nagging deflationary force on the economy, had reached crisis proportions in the first half of the decade; as a result, the government had Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. . Paterson and his associates recognized several salient pointsconcerning the money supply. 298. Butthese Banks keep no Cash, or ever have any stock of Money . Given enough public trust, a bank cannot help but succeed; afterall, if notes are issued for deposited funds a trusting public need nevertry to withdraw its money. [24]Ibid., 3. . Existing European state banks were limited in scope; some,such as the heralded Bank of Amsterdam, were nothing more than transferpoints which improved the mechanics of fiscal transactions while failing tofill any more ambitious role. This report will begin with an examination of the Bank's intellectualand historical background in an effort to show that while many of theBank's functions had already been explored by other institutions, theentire package was a creative act, a unique, selective synthesis of severalfunctions we consider today to be integral to the economic well-being of afinancially advanced state. The interest rates offered on savings were pushed up tosix percent; even then, the bankers were forced to steal Macaulay's image,to roam the royal exchange, soliciting the cash of the merchants presentwith low bows.[6] Having clearly established themselves in the areas of savings andlending, the goldsmiths began to explore a third important area of bankingactivity, that of issue. If the economic crisis which followed the Bank's foundationvindicated the idea of an inflationary note issue, subsequent developmentsin the financial world demonstrated that the Bank's founders had chosen theonly feasible method for making such a note issue succeed. This lively debate began to intensify in the late 17th century asa result of historical circumstance; the expansion of trade and commerce,and in particular the intense commercial rivalry with the Dutch hadconvinced at least some elements that new methods of financial organizationand operation were necessary. Out of this hodgepodge of influences came abrilliant response conceived and supported by an incredibly able team oftheorists, politicians, financiers and administrators. Instead, it was a product ofits immediate time, in conception, execution, and subsequent function. . to lighten the burden on the people with regard to the national debt . Still, they were extremelyeffective in alleviating the mechanical and financial burdens arising fromthe poor state of the currency, and paper was used almost exclusively inlarge-scale financial transactions.[9] In the 166 s, the government itself jumped, for the first and onlytime, into the paper-money field. . The first two parts ofthis paper explored the Bank's place in the history of finance and examinedits conception and design in the eyes of its founders. Thisplan considered both economic and financial theory as well as historicalprecedent and foreign example. R. Bankruptcy on the part of thebanker meant the permanent loss of the deposits entrusted to him.Moreover, goldsmiths participating in government lending needed to have aclearly established relationship with the court; the public had tired of asystem under which the security of their savings depended on the personalinfluence of their banker at court. Had the Bank not existed, the war effort would have been ingrave danger of collapsing due to government bankruptcy throughout thedecade. Still, existing European banks were organized transferpoints only. In fact, the foundation of the Bank of England is a story of greatcomplexity which can be understood only by reexamining the institution as aproduct of its own times. [11]R. Moreover, the relationship between the Englishgoldsmith-banking system and public opinion will be explored. The Bank of England was wholly a response to thecircumstances of the day rather than a clairvoyant anticipation of theeconomic needs of the future. The needfor a viable investment opportunity, a buffer between the government andthe individual creditor, and a source of bills of exchange which wouldeliminate the need to ship actual gold and silver to complete transactionsis self-evident. It wasoriginally formed as a government measure to eliminate disputes in largefinancial transactions. The key feature of the plan, about which Paterson was adamant,was the interchangeability of note and specie. [71]Macaulay, Vol. [65]The account of the political debate on the Bank provisions of theTunnage Act relies primarily on Henry Horwitz's Parliament, Policy, andPolitics in the Reign of William III. The entire amount of ,1,2 , was raised within 1 days.[46] Thespeed with which the stock sold out may indicate the extent to which thesale was arranged and managed by Godfrey; whether fortuitous or not, publicconfidence in the institution was undoubtedly buoyed by the rapidity withwhich the most wealthy and respectable elements in the financial communityrushed to invest their money. It was an importantmilestone in the development of paper money; in the short run, it wasconceived as a means to counter the decline of the money supply, to pay forthe war and to provide the spark of inflation needed for economic growth. Its existence was hardly foreordained; in fact, the adoption ofa major financial innovation in a country which generally justified anadvance as a return to the past is almost miraculous. He traveled widely and established himself as amerchant in London after the Revolution. First of all, it did indeed represent a leap in financialorganization. The supporters of the Bankof Credit had called for a large issue unsupported by cash; they claimedthat there would be no problem with the notes gaining equal acceptance ashard money. [42]William Paterson, A Brief Account of the Intended Bank of England(London, 1694), 4. At the time of therecoinage in 1696, the existing coinage was found to contain only slightlymore than one half the amount of bullion indicated by its face value.[35]Export, clipping, and regular wear and tear had not only created confusionby making the currency non-uniform but was damaging the economy by reducingthe money supply in general. Thepublic was distrustful of such practices, preferring throughout the 168 sto sacrifice interest for the security guaranteed by bankers who did notmake loans at all. may be employed to other purposes.[43] This passage contains the original raison d'etat behind the Bank ofEngland. Popular response to the new bankers was slow to develop despitethe obvious benefits and convenience (particularly the convenience ofnotes) the use of a banking system offered. London: Oxford University Press, 1931.----------------------- [1]In general, the narration of events concerning the bank (where suchnarration is of a factual, indisputable nature) is a composite of severalstandard Bank histories, especially W. Realizing the importance of investment in acapitalist economy, their primary objective was the reduction of interestrates and the expansion of the available pool of credit. Worse yet, the money was in miserable shape. [9]Feavearyear, 97-1 . Theproblems of the previous 3 years were, however, to seem trivial in lightof what was to come. Despite these shortcomings, the Bank's projectors had a number ofgood insights into the problems facing the fledgling banking industry.These were to be taken into account, and met in an innovative fashion, bythe founders of the Bank of England. [14]Richards, 45-62. But it weathered thecrisis. It is understandable that they wouldaddress the problem of the money supply considering the ruined creditmarket, abysmal coinage, and general recession of the years between 166 and 1691, when Paterson first presented his plan to the government. R. The Bank of England From Within: 1694-19 . [3]The account of pre-Bank banking in England in this report is largelydependent on A. Itwas not originally intended to act as a central regulating bank either; thebanks that existed at the time were too primitive to require the existenceof such an institution. Notes from the wealthiest and most established ofbanking houses (such as those of Viner and Backwell) could pass easilythroughout London; those from lesser-known houses were apt to be challengedwhen presented in a transaction. The idea of a national bank was hardly new in the late 17th century.State banks had already existed in Genoa and Venice, two of the chiefRenaissance commercial centers, for hundreds of years. [53]Ibid., 7. Together, these menrecognized that a crisis was about to take place as the demands of the warplaced an unbearable strain on the currency; together, they were to takepreemptive action which had an important role in mitigating the effects ofthe recoinage. . But it went far beyond the scope of these aswell. That the country party viewed the Bank as littlemore than a distasteful method of raising immediate cash was borne out bythe attempted Land Bank of 1696, an agrarian answer to the Bank of England. Still, sometime in the166 s the goldsmiths began to issue notes that acted as currency.[8] Theseinterest-bearing securities were really only the receipts issued to thosemaking deposits. But nowhere did they guarantee thatthe notes could be redeemed for cash; it is doubtful whether this bank'scash reserves would have even begun to cover its note issue, making such aguarantee impossible. IV, 498. Obviously, the feature of theplan which permitted anybody to deposit any goods would have been ludicrousin practice; the image of warehouses filled with rotten food, restlesslivestock, and various worthless junk is rather comic. [72]Li, 111. * * * Appreciation of historical context is perhaps the greatest taskfacing the historian. But such scriveners were notbankers in any sense; they were forbidden to utilize the money in theirkeeping in their own private transactions.[3] Beginning in the 163 s, the cash-keeping functions of the scrivenersbegan to be assumed by goldsmiths. With the outbreak of the war with France, prices jumped abruptly,reversing the deflationary trend of the past 3 years. It is thus useful to consider the intellectual debate surroundingthe national bank issue in the decades preceding the Bank's foundation. Those advocating banks took astonishinglyvaried approaches to the most fundamental questions concerning theownership, scale, financial basis, and functions banks should or couldperform. The fantasticadvances in trade and manufacturing made since the middle ages demandedadvanced methods of dealing with money; unfortunately, existing financialinstitutions and modes of thought were woefully unable to cope with such anincrease in economic complexity. In announcing that they would accept anything ofvalue, including goods of the most bulky sort, the bank was clearly lettingitself in for a daunting logistical undertaking. Based as it was on theinterchangeability of note and specie, Paterson had arrived at the onlyworkable plan among the many which were proposed, avoiding the problemswhich would have faced notes based on non-liquid commodities or on nothingat all. . . [59]Ibid., 7. A price index basedon 12 principal commodities increased from a base of 1 in March, 1692, tonearly 14 by the middle of 1693.[68] Of course, this jump was not due toany increase in the money supply; indeed, the export of large quantities ofbullion to the Continent in order to finance the war and the continueddeterioration of the coinage meant that money had become even more scarceat the same time prices were skyrocketing. But of course, these notes were strictlylimited in their effectiveness. Nor was the supposedWhig stranglehold on the Bank complete; Hedges was a Tory who had beenknighted for his service to James II. He wrote that theproponents of such schemes "cried down the use of Gold and Silver, and upthat of other Materials in lieu thereof; but when they found the world veryunwilling to leave their old way without a better Reason . Crisis and controversy were to follow the Bank until thepresent day. Thus a Society of Private men will be obliged by their Estates and Interests, to strengthen and corroborate the publick security of this Bank.[49] Having taken pains to make the Bank appear a safe and attractiverepository for savings, the Bank's founders set about establishingparameters of activity which would be at once most beneficial to thegovernment, shareholders, and public at large. TheseBanks are properly funds of perpetual interest."[52] Finally, there were ahandful of banks (including those in Naples and Genoa) which, like the Bankof England, combined the two functions. [84]Ibid., 134. G.Dickson's The FinancialRevolution in England. . As is too often the case,contemporary work has failed to expand the scope of analysis beyond theoriginal outlook of Macaulay. And thelowering of interest, besides the encouragement it will be to industry andimprovements, will, by a natural consequence, raise the value of land andincrease trade . per year was to bepaid to the holder of each ,ð1 ticket (a rate of 1 percent interest) for16 years; in addition, ,ð4 , was to be divided among those who had ,1 ticket (a rate of 1 percent interest) for 16 years; in addition, ,4 , was to be divided among those who had purchased "winning" tickets in prizesup to ,1 . Bankhistorians, their vision obscured by hindsight, have focused on the Bank'srole as an intermediary between the individual lender and the government,and as an intermediary between the individual lender and the government,and as a bank to other banks as in our federal reserve system.[33] Thesefunctions were not seriously considered by its founders. But the blow dealt to banking by theStop did not heal. While simple narration of the factual events is arelatively easy task, sophisticated analysis calls on the entire breadth ofknowledge and imagination the historian can muster. Moreover,the Dutch system was more secure: The great Difference between the most famous Bank of Amsterdam . In addition, therewas no concrete provision for the banknotes' success. "[51] The second type, including the banks of Rome, Milan, and Paris,were "made up of . Moreover, the intellectual, social and economic forceswhich forged the Bank are obscured by the importance of the subject.Existing Bank histories are understandably transfixed by the dynamic roleit was to play in shaping Britain without going deeper than mere narrationwhen considering the Bank's all-important formative years.[2] Generalhistories of the period are too hard-pressed analyzing the massivetransformation (particularly in financial and economic terms) of Britishsociety in the 169 s to pay the Bank much heed. Obviously, as the number of survivors diminished, the paymentsto those remaining would increase. . In addition, the Bank's founders carefully shaped their organizationin order to ensure its success, adapting their public image and methods ofoperation to assuage the fears and gain the confidence of the public. [19]This pamphlet was entitled Seasonable Observations Humbly Offeredto His Highness the Lord Protector (1658). [6 ]Ibid., 5. The Bank offered to redeem them at any time, in cash. . For this reason, the goldsmiths began actively toseek out the money formerly deposited with the scriveners and searchthrough it for the meatiest coins. . On the other hand, the slightest sign ofweakness could lead to a run even the strongest bank could not withstand.With this in mind, those seeking to establish a banking institution mustcarefully pander to public tastes and assuage public fears in every stageof its design and operation. 1696). In the 166 s, about,8, , worth of these tallies were in circulation.[1 ] Although theywere transferable, their bulk and the difficulty of writing endorsements onthe wood limited their effectiveness as a means of exchange. Four percent interest (sixpercent in Ireland) would be charged along with a warehouse fee not toexceed two percent of the goods' value. Tradeexpanded, and the years of peace lasting through the end of James II'sreign served to reduce government borrowing and loosen the money supplyfurther. The amount of precious metal in each wouldmatch pre-recoinage specifications. In addition,the validity of the note depended on the solvency of the individualgoldsmith who issued it. They did not lend out deposited cash, a function which allowsinflation, the easing of credit, and economic growth. Most importantly, the state of the coinage wasabysmal and growing rapidly worse. Interest rates for personal borrowing dropped and credit ingeneral was more easily obtained. . Direct quotations representing such sentiment will appearlater in the text. The United Provinces were theeconomic Wunderkind of the 17th century, regarded with the combination ofjealousy, hatred, and fearful respect today accorded Japan; theircommercial success was the main reason behind the series of Dutch wars inthe second half of the century. [39]The biographical details concerning Paterson's life are sketchy.He seems to have been born in Trailflat, Dumfries-shire, in 1658 (althoughthe date is uncertain). [37]A. For this very reason a national bank hadnot come into being, despite the obvious advantages such an institutionwould provide, during the 3 years prior to the revolution. But by 1696,the English public felt no such sense of security. The national debt was considered a wartime expedient, an emergencymeasure to be liquidated with the coming of peace and the return toeconomic normalcy. The war and resultingcomplications, and the recoinage necessary in 1696, stretched thepolitical, economic, and administrative sinews of the state and societynearly to the breaking point. . [69]Ibid. E. While there were hundreds of years of crisesahead, the Bank's very existence was never to be questioned seriouslyagain. [7 ]James Thorold Rogers, The First Nine Years of the Bank of England(Oxford: Clarendon Press, 1887), 165. . In order to ease transactions involving a largeamount of cash, merchants traded notes instructing their individualscriveners to pay the notes' bearers in cash. While the most recent lotteries had offered1 percent interest in addition to prizes, the sale of Bank stock, whichwas in essence the purchase of government debt at only eight percent, wasastounding. . [81]The Bank bills were discounted up to 22 percent at the height ofthe crisis of confidence in the spring of 1697; by the beginning of 1698they were finally trading at par. [41]Michael Godfrey, "A Short Account of the Bank of England," (London,1695) as reprinted in Somers Tracts, 5. First, itdemonstrates English fascination with the fiscal innovations of its twogreatest commercial rivals, the Dutch and Italians. [52]Ibid., 2-3. [29]The general outline of the provisions for the Bank of Credit comefrom Murray's An Account and Robert Verney's England's Interest or theGreat Benefit to Trade by Banks or Offices of Credit (London, 1682). The list of subscribers, and especially those who were to goon to sit on the original 25-man board of directors, is an impressive andfairly broad cross-section of the most influential elements in society.[47] The King and Queen subscribed ,1 , on the first day, and Montaguhimself purchased a sizable amount of stock; this established the Court'svested interest in the Bank's success, which ostensibly guaranteed that thegovernment's payments to the Bank would not be neglected. Transfers between accounts could be made either by passing the notes or bywriting instructions to the Bank to transfer funds (i.e., modern checkwriting). [31]The list of benefits is paraphrased from Verney, England's Interest. . As weshall see, Paterson and his confederates carefully constructed a publicimage for their new Bank designed to meet these concerns. Debts owed by the government hadformerly been recognized through a system of wooden tallies; the Exchequerissued notched sticks indicating the size of the principal, the amount ofinterest owed, the fund upon which the revenue had been anticipated, andthe date upon which redemption was possible. Deficits were large, the revenue had been completelyanticipated into the foreseeable future, and every available source ofcredit had been exhausted. they runfrom their new Mistake to an old one, which was, That the Stamp orDenomination gives or adds to the value of money."[56] He maintained that"all money not having an intrinsic value . The depletion of thecurrency, so long a nagging deflationary force on the economy, had reachedcrisis proportions in the first half of the decade; as a result, thegovernment had begun a recoinage program of enormous scope, the failure ofwhich would mean mass economic confusion and depression. And if the Pro- prietors of the Bank can circulate their Fundation of Twelve Hundred Thousand Pounds, without having more than Two or Three Hundred Thousand Pounds lying dead at one time with another, this Bank will be in effect as Nine Hundred Thousand Pounds, or a Million, that . . As has been pointed out, the Bank'sinitial subscription raised a very considerable sum at a time when allother plans for raising cash seemed fruitless. The lack of sound money naturally hindered commerce; thesituation was to reach crisis proportions in the 169 s. [78]The figures come from a balance sheet submitted to the House ofCommons on 4 December 1696. II If the form the Bank of England was to take was a response to theproblems confronting the English banking industry, its substance was noless dictated by the pressing economic concerns of the day. It was their banknotesscheme, a thoughtful and measured response to the problem, that served asthe centerpiece of their new institution. The bank notes system, theprimary feature of the plan, was designed to answer the currency shortage,perhaps the major economic concern at the time. * * * Before proceeding to examine the conception and design of the Bank ofEngland itself, it is necessary to consider its most direct antecedents.In the wake of the post-Stop retrenchment, agitation for a national bankbegan in earnest. Closer to home, andcertainly foremost in the minds of the English intellectual community, wasthe Bank of Amsterdam, founded in 16 7. [75]Locke presented his case in Further Considerations ConcerningRaising the Value of Money (1696). At the height of the crisis, Montagu, now Chancellor of theExchequer, began issuing bills of credit that later became known asExchequer Bills. Unfortunately, historians of the Bank of England have generallyfailed in this regard. Despite thefact that the Bank did indeed faithfully honor its pledge to exchange itsnotes for cash on demand, they circulated at a discount for the first threeyears of their existence.[81] Had the notes been unsupported by cash,there is little doubt they would have been valueless. They had clearly found their inspiration from the same source:Paterson and Godfrey. Consumer prices inEngland dropped 2 percent between 166 and 1688,[36] before the increasein prices caused by wartime shortages in the 169 s. "Tosumme up all, whatever increaseth Money, or a valueable Credit equivalent,increaseth Expence and Consumption; and whatever augments Consumption,Increaseth Trade, and Imploys more Hands, so that England . Mostimportantly, it recognized the possibilities a note issue offered in termsof providing the inflation unavailable to the economy by any other means.The Bank of England was unique in combining these practices and thus mustbe considered an important leap forward in the history of financialinstitutions. . Between 1695 and 1697, no fewer than 91 books and pamphlets werepublished on the poor state of the coinage and the means necessary forrectifying it.[73] In general, the debate centered on the question ofdevaluation. Paterson had responded to a problem which was soon todegenerate into a crisis; the financing of the war and the furtherdeterioration of the coinage to an unusable level was to place new andalmost unbearable pressures on the money supply and on the economy as awhole in the mid-169 s. After its foundation the Bank both shaped and was shaped bycontemporary circumstances. But more importantly, it was a product ofand response to the specific political, social and economic conditions ofthe immediate present. In fact, they felt that the convenience of paper money wouldmake the notes the preferred medium of exchange; in any event, theyadvocated that they be made legal tender for all transactions (includingpayment of taxes).[55] Such a system would have led to chaos. Trouble was avoided in the Commons, where theneed for money was generally recognized as overriding all other concerns;still, in order to avoid a division, the government called the note late inthe session after many of the less committed country members had departed.In the Lords, however, the Bank met its stiffest test. Their creation, theBank of England, was essential to the survival of the British economy andwar effort during its formative years, culminating in the magnificenttriumph of the Bank and the principles on which it was founded in thespring of 1696. . . The political nation,dominated by the Anglican "squirearchy," suspected any innovation as anattempt to break down the traditional political and social order underwhich they, of course, ruled. [23]Murray, A Proposal, 4. The Bank had no choice but to support a government incontinual desperate need of money, beginning the snowballing assumption ofdebt which was to become the primary characteristic by which we identifythe Bank today. Had the Bank of Credit actually been founded, anumber of flaws would have dragged it down. While the Bankdid immediately make large loans to aid in the prosecution of the war,government debt was at this point not recognized as an integral part ofnational finance. The coronation of William and Mary andthe prospect of protracted and costly war with France could not have comeat a worse time for an economy with a tight credit market and adeteriorating means of exchange. While excellent, it is 1 1 years old, limiting itsusefulness. For obvious reasons,the temptation to analyze based on the mind set and assumptions of thepresent day and to rely on the comforting knowledge of historicalinevitability must be indulged in sparingly and with great caution. [25]Again, this factual information on foreign banking comes primarilyfrom Acres, Andreades, Clapham, and Feavearyear, as well as thecontemporary economic tracts cited above. [85]J. .both."[5 ] In the first group, Janssen placed the banks of Amsterdam,Rotterdam, Hamburg and Stockholm; "These Banks have no [government-paid]Income, no Adventurers or Sharers in their Profits: They are only greatChests, for the Conveniency of transferring from one account to another . In design and form the Bank was as adventurous as possible while stillremaining acceptable to a nation with little experience in dealing withfinancial innovation. . One key point about banking as an industry is theenormous importance of psychological factors in determining its success orfailure. [13]Lotteries are obviously drawings for prizes. All payments over a certain amount were requiredto be witnessed by notaries at the bank; these notaries would also keepcash and issue Bank of Amsterdam notes for money left in their safekeeping. Most importantly, the public distrusted the tenuous privatefoundation of the goldsmith banking houses.[18] Since the banks were ownedby single individuals, the security of the customers' assets depended ontheir bankers' personal financial status. But "no other Bank gives out Notespayable to the Bearer (emphasis added)."[53] Actually, unbeknownst toJanssen, the Bank of Stockholm had experimented with a note issue beginningin 1661 but the project had been a failure and the government had orderedit to stop three years later.[54] The banknotes plan was in reality anadaptation of the system used by the goldsmiths, unique in that itattempted to establish the system on a national scale. Repeating commonlyheld economic wisdom, he noted that "the Greatness and Riches of the UnitedProvinces, and States of Venice, Considered, with the little Tract ofGround that belongs to either of their Territories, sufficientlydemonstrate the great Advantage and Profit that Trade brings to aNation."[21]In "Citys of great Trade," he continues: there are publick Banks of Credit, as at Amsterdam and Venice: They are of great Advantage to Trade, for they make Payments easie, by preventing the continual Trouble of telling over Mony . The practice of bankslending large amounts of the deposits out while keeping only a smallpercentage on hand was hardly a new one; indeed, this first law of bankinghad been practiced by the goldsmiths and by moneylenders of all sortsthroughout the ages. The preceding discussion of pre-Bank banking history is not solelyfor curiosity's sake. [3 ]These ideas were rpesented in Petty's A Treatise of Taxes andContributions (1679), Barbon's Discourse, and the two Bank of Creditproposals cited in the preceding note. Still, by 167 , the goldsmithshad developed a system which offered savings (for interest), lending (bothto private parties and to the government), discounted foreign bills ofexchange, and issued notes which, though primarily interest-bearingsecurities, also functioned as currency. Moreover, Paterson'srejection of banks based on commodities besides cash (such as land orgoods) was borne out by the land bank fiasco of 1696. It is difficult to underestimate the overall effect of the Bank issueon the money supply. Public suspicion of bankers lending to the governmentwas particularly acute, and, of course, such lending was a prerequisite forministerial support of the project. Paterson himself noted the obstaclesthe new Bank faced in winning over the public; during the formative stagesof his scheme: the very name of a Bank or Corporation was avoided, tho' the nature of both was intended, the Proposers thinking it prudent, that a Design of this Nature should have as easie and sensible a beginning as possible, to prevent, or at least gradually to soften and remove, the Prejudice and bad impressions commonly conceived in the Minds of Men against things of this kind, before they are under- stood.[44] A number of steps were taken in order to create confidence in the newinstitution. Moreover, national lotteries were rapidly losing their grip on thepublic imagination; the lottery loan of 1697 raised only ,17,63 instead ofthe hoped-for ,1,4 , .[62] In casting about for alternative sources ofcash, the ministry decided to try a variation of an old Stuart ploy:selling economic privileges. The notion of a national bank seems less likean innovation than an idea whose time had clearly come by 1694. [36]E. Jones, Country and Court: England, 1658-1714 (Cambridge,MA), 27 .----------------------- 1 With the Glorious Revolution, the subsequent involvement in the warswith France, and the financial burdens those wars imposed, things changed.The government, starved for cash, was willing to explore any potentialmoney-raising scheme, and a number of would-be bank promoters aired theirvarious cases. I Banking, and indeed financial thought and practice in 17th centuryEngland, was a science desperately seeking some foundations. [5 ]Sir Theodore Janssen, A Discourse Concerning Banks (London, 1697),1. The secondpart will consider the conception and design of the Bank itself, a designwhich, it will be seen, did not anticipate the future functions the Bankwas to assume but was instead a response to the immediate problems of theday. Merchantskept their money in strong boxes in their homes or, as time went on, leftit in the keeping of scriveners who performed basic bookkeeping andaccounting functions. From the goldsmiths it adapted the modern banking practice oflending out deposits and using a portion of the revenue for the payment ofinterest on deposits, something national banks had rarely done. [66]William ordered his secretary, William Blathwayt, to draft a formalletter of thanks to the Bank and its directors (Calendar of State Papers,Domestic Series, 11 Aug. . [28]Ibid., 9. Each of thesedevelopments, in addition to creating a general atmosphere of insecurityand tension, directly undermined the fledgling Bank's financial position.In order to permit the continuation of the war, the Bank had been forced tomake emergency loans to the government; in light of the desperate shortageof hard money resulting from the recoinage, the Bank's cash reserves weredangerously low. This was no easy task for the founders of the Bank of England. Most of the largest houses, who had lentevery available cent to the government, were eventually ruined. As fresh money rolled out of the mints and the government'sfortunes stabilized, the Bank managed to shore up its reserves and finallyresume its normal operations. The Bank also used its status as a joint-stock company to establishcredibility. The government's financial situation became increasingly strained asthe 167 s began. With the grant of official monopoly status in 1697, its position asthe nation's primary extra-governmental financial institution wassolidified, a role which it has continued to play through the presentday.[1] In retrospect, the foundation and early development of the Bank ofEngland seems cut and dried. D. [73]This many pamphlets are cited in Li's bibliography. The last recoinagehad taken place in 16 6; coins dating from Elizabethan times were stillcirculating.[7] Moreover, the "clippers," who shaved the excess preciousmetal from the edges of coins, left the already worn money damaged evenfurther. Itbelieved in 17th century ideas, pandered to 17th century prejudices, andwas both a product of and a remedy for 17th century economic crises. . . Richards, "The Stop of the Exchequer," Economic History II(1933), 45-62. . The political and economic elite ofthe city was thoroughly represented on the board; several were to sit asM.P.s for the city and six of the original 25 directors were subsequentlyto become Lord Mayor. There were enormous price fluctuations;the index fell to less than 11 by mid-1695, only to fall back to 145within a year as a result of poor harvests.[69] Prices of imported goodsalso jumped due to a drop in the value of English money; the pound fell 12percent on the Amsterdam exchange in 1695.[7 ] At the root of these variedcatastrophes lay the faulty currency system. In 1658, Samuel Lambe published the first seriousproposal for such an institution.[19] Citing the existence of successfulnational banks in such places as Venice and Amsterdam, bank supportersnearly established a National Bank of Credit in 1683. The warcontinued thanks to its loans, and its notes (and the Exchequer Bills theyinspired) helped England weather a potentially disastrous liquidity crisis. The advent of the joint-stock company was in reality the adventof limited liability; shareholders were not responsible for the debts ofthe firm beyond the amount of their original investment. D. Like goldsmiths' notes, these Exchequer billswere interest bearing, were issued in standard denominations (,1, ,2, and,5), and could be transferred if properly endorsed. [48]As John Evelyn put it in his diary, the Bank was "put under thegovernment of the most able and wealthy citizens of London." [49]Paterson, 11. Although ourknowledge about the actual debates is limited, a coalition of Nottingham,Rochester, Halifax, and Monmouth seems to have risen against the Bank andthe monied interests it represented. But it did not handle most of the transactions we considerfundamental to modern banking. But it could beargued that the Bank of England was a more impressive achievement for whatit did in its own day than for what it has done in nearly 3 years ofservice to Great Britain. . In addition, the Lords feared reawakeningan ongoing dispute with the Commons over their right to amend money billssuch as the Tunnage Act. [7]Feavearyear, 113-4. Instead, the key to the Bank's design lies, not inany of the modern economic functions it has come to assume, but in itsresponse to the immediate economic and political issues of its own day. to avoid dislocation of prices, and . But the Bank's founders were the first to recognizethe possibility that a large-scale national bank could control the moneysupply, produce mild inflation, and thus stimulate investment and createeconomic growth. Still, the association of so many important names with theBank established a credibility (if a false credibility) of the sort that asingle individual could not hope to maintain. Inthis sense, the Bank fulfilled its first and perhaps most importanteconomic mission, the task for which it had originally been designed. The private ownership of the Bank was carefully downplayed inorder to avoid identification with the narrow foundation upon which thegoldsmith-banks had been based. The Bank's stock fell and the value of its notes onthe market dropped to 75 percent of face value. Afterrepeated requests they agreed to remit the ,4 , needed to keep thetroops paid through the winter. Theyhad more success in forecasting the currency crisis of 1696-7, which theBank Notes and the Exchequer Bills they inspired played a key role insolving. . [56]Paterson, 3. Silver was undervalued in relation to gold so that profits of upto five percent could be achieved simply by melting silver coins intobullion for export to Holland. D. Aboveall, events must be considered within their own context; contemporarystandards of morality must be used when forming judgments and contemporarycircumstances must be fully understood when assessing causation and effect. In1683, Robert Murray writes "that multitudes of Families have of late beenundone by intrusting their Cash . When the owners failedto repay the principal, the goods were to be sold in a similar manner.[29] This scheme was motivated by a strong pro-inflationary trend amongmany of the political economists of the time, including Sir William Petty,Nicholas Barbon, and the promoters of the National Bank of Credit.[3 ]Realizing that money, and even gold and silver bullion, lacked anyintrinsic value, these men advocated wholesale currency manipulation,devaluation, and inflation as the panacea which would solve all theeconomic woes of the time. may, whenby this Office supplyed, with as much stock as is necessary, become theEmporium of Europe."[32] It is doubtful, however, whether reality would have borne out sooptimistic a forecast. . the best [bank] in Christiandom . An economybased for so long on actual precious metal would have been loathe to accepta new flood of unsupported paper; such paper would have circulated at onlya fraction of its face value, had it been accepted at all. [63]The original provisions for the Bank called for a loan of,1,2 , to the government upon which eight percent interest would bepaid annually. Feavearyear, The Pound Sterling: A History of English Money(London: Oxford University Press, 1931). Robert Murray saw the Bank of Amsterdam as existing on threeprinciples: First, an Authentick Registry of all Receipts and Payments. Far from being an obviously useful and beneficial institution, the idea ofa national bank attracted only suspicion and distrust from the majority ofthe political nation.[65] The government itself had a far different conception of what the Bankmeant to the realm; while the finer points of economic theory may haveescaped all but the most fiscally astute ministers, the role of the Bank insupplying the war effort drew effusive praise even from Williamhimself.[66] Although the conception of the Bank as conservator of thenational debt was beyond the contemporary understanding of governmentfinance, the ministry quickly realized the Bank's ability to tap into acredit market which was otherwise completely resistant to lending directlyto the government (thanks in no large part to the cosmetic aspects of theBank's design discussed in Part II). With less money in circulation, the amount ofavailable credit was naturally reduced; the resulting rise in interestrates choked new economic enterprises which most needed to make use of suchcredit. In short, the Bank was owned and run by abroadly based representation of all the economic and political "interests"in the country.[48] Of course, the Bank was a joint-stock company; each ofthe subscribers had made only a relatively small investment (,1 , wasthe maximum amount allowed) and liability was limited to the amount of thatinvestment. The Bank hastraditionally been considered a stronghold of dissent, but the Church ofEngland was represented on the board by such notables as Gilbert Heathcote,William Hedges, William Gore, and Godfrey himself. "There are, in severalParts of Europe, about thirty Banks," he wrote, "chiefly of three sorts.Some are only for Safety and Conveniency, others are for the Benefit ofIncome only, and others [including the new Bank of England] . Inaddition, the always sorry and often desperate state of government financesput extreme pressure on the economy and on the new financial institutions.All of this is evident in the history of one area of the financial crisisof the 17th century: banking. . . Clearly, alucrative business could come from melting down large coins for export orimmediate recoinage. Even in the face of fiscal disaster, the Commons was reluctant toapprove Paterson's scheme. [because other Banks are not] corroborated by the Interests, Property, and Estates of Private Men . . Since the war, economic conditions had become more appropriate for a devaluation . Marston. . [33]A partial list of existing Bank histories may be found in thebibliography. Men, who in time of War or other Exigences of theState, advanced Sums of Money upon Funds, granted in perpetuum . Powerful reactionary elements greatlymistrusted financial organization of any sort. (From Table IV in Rogers' The First NineYears.) [82]Andreades, 1 7. The bankers who were to rise to prominence after theStop (chiefly Sir Francis Child and Sir Richard Hoare) practiced on alimited scale, avoiding any direct large-scale lending to the King. The need for fresh loans to support the warset the Bank firmly on the path toward the assumption of the national debtdespite the fact that such a role was not envisioned by its founders. They claimed the Bank would actuallydecrease the money supply by hoarding cash that would otherwise be incirculation; in particular, they feared the depletion of the amount ofcapital available for mortgages. "When Parliament met in November, 1695, it was generally agreedthat something drastic had to be done, otherwise the country would soon beruined and forced to make peace on unfavorable terms."[72] Shortlyafterward, the panic over the currency spread to the general public.Widespread capital flight began as investors attempted to transfer theirassets to Holland. 1, 1938. Schumpteter, "English Prices and Public Finance, 16 -1822,"Review of Economic Statistics, Vol. No loans were made, and interest was notpaid; as for the goldsmiths back in England, convenience and organization,rather than economic expansion, were the primary benefits. [15]K. . ,3 , , an amazing sum, was raised in the first daysubscriptions were taken, and the same amount was sold within the next 48hours. In 1694 the scheme was finally passed (tacked to the Tunnage Actof that year) only because of the support of the government and thecontinual shortage of money. The year 1673 saw the first published proposal for a national"Bank of Credit;" such a bank nearly came into existence in 1683. [2]Only one book, Thorold Rogers' The First Nine Years of the Bank ofEngland, specifically covers the Bank's foundation and operation during itsformative period. The nature of the entrenched,conservative opposition to the bill can be discerned from the fact that theentire bench of bishops (with the exception of Tillotson, Archbishop ofCanterbury) broke with the government and voted against the measure. Others were only collections of governmentcreditors who received a permanent income but practiced no modern bankingfunctions. Hestood firmly against making the notes legal tender, correctly realizingthat only public confidence in the fact that the notes represented actualmoney and were fully interchangeable with specie would guarantee theiracceptance on a par with hard currency. And he had tailored his new Bank to meet the necessitythrough his innovative emphasis on Bank notes as an alternate form ofcurrency. . Genoa,Venice, and most importantly, the Dutch, had comparable institutions whichserved as bulwarks of their considerable commercial prosperity. Paterson rejected the idea of paper money based on a non-liquidcommodity, such as land, or with no basis whatsoever. Hiscentralized mobilization of all facets of the state to conduct a war thescope of which was certainly unsurpassed by any undertaking since the ageof Elizabeth was a fantastic political and administrative feat; it mayindeed be considered England's greatest administrative revolution. Enthusiasm for such an organization was low among the country gentrywho comprised most of the political nation; had the war not taken place, itis unlikely the Bank would have come into existence for years to come.Even the government itself saw the Bank as little more than a source ofmoney as opposed to a necessary economic innovation. "[41] The same theme was sounded in an earlierpamphlet entitled A Brief Account of the Intended Bank of England writtenby Paterson himself. They possessedstrong boxes necessary to keep deposits safe from theft and fire, and theyhad experience dealing with foreign currencies. [74]Lowndes presented his case in Some Remarks on a Report ContainingAn Essay for the Amendment of the Silver Coins (1696). is false andcounterfeit,"[57] realizing the impossibility of forcing a new system on apublic which firmly believed in money as inherently valuable. Although in its conception the Bank did embody rather grandioseprinciples of economic theory; it received its political support solelybecause of the immediate need for money. The Bank had based its operation on the standardconfidence trick which powers modern financial institutions: lending outthe money that had been deposited therein and keeping only a small cashreserve on hand to meet the needs of those wishing to make withdrawals.Such a system works perfectly well when public confidence in the state ofthe bank, the economy, and the nation as a whole is strong. Jones'Country and Court: The Bank, by institutionalizing government creditors, gave them a secure and privileged status which was to continue after the end of the war. In the end this report hopes to show that the Bank, that solidfinancial pillar upon which the British economy is still built, was hardlydesigned with its future functions in mind. . If the Bank was crafted to appeal to a 17th century public, it wasalso tailored to aid the 17th century economy. B. [46]Clapham, 19. These bills were identical to Bank of England Notes invirtually every respect; they were interest-bearing, issued in standarddenominations, transferable, and most important, payable in cash on demand. [12]Feavearyear, 1 6. [44]Ibid., 9. The demands of the war culminated in the liquidity crisis of1696-7 and the recoinage, placing unbearable strain on the economy. . More importantly, it adoptedcentral features of the goldsmith system (lending out a large percentage ofthe deposits, the payment of interest, and the issue of notes) on asufficiently national, secure, and bipartisan scale (or such was the publicimage it hoped to cultivate) to ensure a reasonable chance of success.Most importantly, the Bank's founders saw the institution not as a meansfor the management of the national debt or as an improvement in economicorganization (the existing goldsmith system did, after all, offerconvenient notes which were generally accepted in commercial transactions). While thegoldsmiths did not have the public trust necessary to pull off theconfidence trick which powers modern banking, the Bank of England wasdesigned to overcome this limitation. In A ShortAccount of the Bank of England, written within a year of the Bank'sfoundation, Godfrey maintained that an increase in the amount of availablefunds would "infallibly lower the interest of money . In order for such a plan to succeed, a number of obstacles needed tobe surmounted. [51]Ibid., 2. Unfortunately, theywere paid off in the order they were issued, and the fact that they couldnot be redeemed on demand meant that they circulated at a heavy discount.Of course, they were made totally worthless by the Stop of the Exchequer. The situation grew steadilyworse during the next three years. The apparent failure of the later group caused in large part bythe Stop of the Exchequer destroyed public faith in private individualsseeking to assume banking functions and consequently left a void infinancial organization, fueling more interest in the great public banks ofAmsterdam and Genoa. At this point, the government, in effect,declared bankruptcy. The results for thestate of banking were disastrous. The Bank, he asserted, would answer "the want ofpublick Funds" resulting from the war: when this War begun, the Credit of the Nation was low, and the Wits on both sides, found no better nor honester way to supply the Necessities of the Government, than by enhancing the Price and Interest of Money; the effect was, that the government was obliged to pay from double to treble, or higher interest.[42]In order to better "facilitate the circulation of money,"Paterson proposed the formation of a national bank. But in 1667,the decision was made to begin issuing paper Exchequer notes which wouldsupplant the wooden tallies. In the meantime, the items thusdeposited would not lie in mothballs but would be on display for sale withthe Bank deducting its loan from the final price. Nothing could be purchased without a dispute.[71] While Macaulay failed to restrain his passion for rhetoricalenthusiasm, the currency problem was pressing and demanded immediateaction. Repeating acommon complaint, Murray accused bullion exporters and hoarders for thecountry's economic woes; "Trade and Commerce is very much obstructed by thehigh and uncertain Rates of Exchange."[26] Attached to the Royal FisheryCompany, but removed from that company's operations, a bank would beestablished which like its continental counterparts, would "furnish Personswho have Security to deposit, with Current Bills of Credit, as useful asready Money . Paterson's notes were designed to enhance, rather than supplant, theexisting system. The Stop had created toomuch uncertainty and suspicion about banks and all financial innovations.Finally, the massive inflation which would have resulted had the plan goneahead would hardly have driven the country into the predicted economicboom. He clearlybelieved in the fiscal and financial ideas espoused by Paterson andGodfrey; not only did he support their manifestation in the Bank's designbut he adopted them, as we shall subsequently see, as part of thegovernment's money policy during the recoinage. [68]Ming-Hsun Li, The Great Recoinage of 1696-9 (London: Weidenfeldand Nicolson, 1963), 9. At the time of the Revolution, theEnglish financial system had happily regressed, abandoning aggressive andadventurous development of the credit market for conservatism andfrivolity. [64]These objections were raised in the Parliamentary debate on theBank; in addition, they were all addressed by Paterson in his BriefAccount. . The standards ofcoinage undervalued silver in relation to gold; thus, a properly sizedshilling contained more than a shilling's worth of silver. The circumstances of their professionrendered them particularly suitable to act as bankers. . . Of course, the absence of any medium of exchangebesides actual coins caused numerous headaches for the merchants of theperiod. .. [27]Ibid. The supply of silver money, theprincipal medium of exchange, had been dropping sharply for a variety ofreasons. Money-lending, one of the two fundamental banking functions,was carried out both by pawnbrokers and private individuals, but waspartially stifled by medieval prohibitions against usury. The famous Stop of the Exchequer was originallymerely a 12-month suspension of the payment rotation for the Exchequerpaper; in effect most of the money was never paid. He died in1719. . . [16]Robert Murray, "A Proposal for a National Bank" (London, 1696), 3. Such loans were to continue as the Bankgradually began to assume its more familiar role as the manager of thenational debt. Interest rates werestiflingly high; the government was forced to pay more than twice the legalsix percent limit in its first efforts to raise money to fight the war.[37] But more often than not, money was simply not to be had at any price; acentury of less-than-trustworthy Stuart borrowing practices had discouragedmany potential lenders, and large-scale lending had ceased to be a primaryfunction of the goldsmith-bankers. He had realized, atleast in a vague way, the usefulness of inflation under certaincircumstances. Finally, on the aforementioned date, the goldsmith bankers whosefunction had been superseded by the new Bank decided to strike. TheodoreJanssen, one of the original board of directors, summed up the Bank'sfunctions and differentiated it from its continental predecessors in apamphlet entitled A Discourse Concerning Banks. King & Son, 1924), 35. [5]The reigning authority on the Restoration financial settlement andthe fiscal history of Charles II's reign is C. Feavearyear's The Pound Sterling and T. Theimage of a solid national bank, distanced from the practices of thegoldsmiths (although in actual operation they were rather similar), andtied to the King, the monied classes, and most of the influential elementsin society were carefully presented by Paterson and Godfrey. . . Macaulay'sHistory of England from the Accession of James II, in addition to the Bankhistories cited above. England was irrevocablylocked in a costly and seemingly unwinnable struggle against the France ofLouis XIV, the most powerful country in Europe. At the risk of over-generalization, conventionalhistorical opinion not only pays insufficient attention to the Bank ingeneral but misunderstands its background, conception, and implementation.The Bank is seen as a logical and overdue improvement in financialorganization which had previously been explored by other Europeancountries. G. . Specie was inconvenient to transport and bore the risk of theftand loss. Their ideas influenced CharlesMontagu who, it will be remembered, had as a junior minister introduced theBank proposal to the ministry and helped guide its passage throughParliament. As Macaulay put it: The evils produced by this state of the currency were not such as have generally been thought worthy to occupy a pro- minent place in history. While the goldsmiths had originatedthe practice of issuing paper based on money which was actually circulatingelsewhere in the economy, Paterson and his confederates were the first toimplement such a scheme with the knowledge that it could have far-reachingbenefits for the entire economy. Had they succeeded,the character of English banking would have been dramatically different.Contrary to commonly held opinion, the Bank of England was neither animitation of foreign example nor an idea which had already been floatingaround for years; it differed greatly from both the great foreign banks andthe bank plans which had been proposed in England during the previous 3 years. Paterson had divined the need for a fresh influx of currency butavoided the radical and irresponsible elements of the pro-inflation schoolwho advised massive issues of paper money made legal tender by statute butwithout any backing in the form of hard currency, a step which would eitherhave failed to gain public acceptance or produced massive inflation of thetype experienced by Germany earlier this century. Three conclusions arise from the implementation and operation of theBank during its early years. But ofcourse, the transition was hardly painless. [2 ]Murray, A Proposal, 4. Their final designsurpassed most existing continental banks in scope, taking on a combinationof functions which anticipated the operation of modern banking. Second, it reflectsthe widespread suspicion that the private goldsmith bankers were unreliableand supports the hypothesis that the system survived, not because it wasconsidered a particularly lucrative investment, but simply because itoffered a method to replace inconvenient specie with paper. Atthe heart of the matter, the landed Anglican squirearchy (who comprised thebackbone of the political nation) were understandably mistrustful of a planwhich reeked of London, Dissent, Whiggery, and the commercial classes--inshort, everything they detested. Bank-owned warehouses,staffed by auditors who assessed the worth of incoming goods, would haveheld pawned merchandise up to 12 months. in the hands of Private Persons, whohave frequently turned Bankrupts and involved divers in their Ruine."[16]Public confidence in lenders doing business with the government wasnonexistent; "The Mystery of the New Fashioned Goldsmiths," a highlycritical pamphlet published in 1676, attacks government lending from twodirections, complaining that it put the goldsmiths at great financial riskas well as "enslaving" the government.[17] The failure of the maingovernment creditors barred most post-Stop bankers from participating inthis important area; government lending was simply considered too risky byclients who were above all concerned with the security of their assets.The fact that post-Stop bankers did not offer interest showed that theirprofession had indeed regressed; they had become little more than safe-keepers as the scriveners had been. 1 , No. On 14 December 1695, the King issued aproclamation declaring that all clipped money would be called in in stagesand recoined throughout 1696. The index is based on price quotations listed inJohn Houghton's weekly paper entitled A Collection for the Improvement ofHusbandry and Trade. More importantly, the standards used by theEnglish mint for determining the amount of precious metal in each coin wereflawed. By thebeginning of the 169 s, they did ot even pay interest; their clientsdeposited their money simply for the convenience the use of bank notesoffered.[12] The effect of these small-scale bankers was felt primarily inthe London area. [34]The general narration of the economic conditions of the period isbased primarily on J. First of all, the Bank itself needed to maintain thepublic's confidence in order to attract sufficient deposits. [77]Much of the assessment of the recoinage and its effects presentedin this report are based upon Li's book. [8]Sir John Clapham, The Bank of England: A History (Cambridge,England: Cambridge University Press, 1944), 1 . [43]Ibid., 13-4. The strength of William's position and theresourceful and effective administration of the Junto cabinet allowed theeconomy to survive and the war effort to continue. Thus, while the Bank wasundoubtedly viewed as an excellent potential source of emergency cash, therole it was to assume as manager of the national debt was not foreseen. Andreades' History of the Bank of England, and Sir JohnClapham's The Bank of England: A History. He was responsible for sifting through more than 9 banking schemes which the government received during the early 169 s;[4 ]once he had chosen Paterson's plan he took the primary role in its guidancethrough the cabinet itself and through Parliament in general. Jones' Country and Court: England, 1658-1714. He had recognized the way in which the dangerouspre-war deflationary trend would be aggravated by the war before the actualcrisis focused the nation's attention on the problem. The East India Company had been shipping bullion abroad in orderto pay for its imports. In 1682Robert Murray, one of the early advocates of a National Bank of Credit,wrote: "the most Famous Bank of Amsterdam" was "justly esteemed one of thepillars and props of Holland" and "incomparably the best and greatest[bank] in the World."[2 ] The case for a national Bank along the Dutch model was perhaps bestput by political economist Nicholas Barbon in 169 . In short, they meanta simple improvement in organizational method as opposed to a great leapforward in financial management.[25] If the foreign banks were disappointingly conservative in theirdesign, early English national bank proposals erred in the direction ofradicalism. The tontine, today a forgotten scheme, involved the paymentof a certain amount of interest to the holders of the debt for a fixedperiod; after that, a set amount of cash would be divided among thosesurviving. Also, the notes did not all promiseimmediate redemption to the bearer in cash; most stipulated that advancenotice must be given before withdrawal. [4]A. But within thefinancial community, they were the preferable means of exchange at a timewhen virtually any sort of commercial paper was being pressed into serviceas currency.[79] Using Li's estimate of ,16,2 , as the approximatevalue of the entire amount of all specie, gold and silver, domestic andforeign, in the realm in 1695, the banknotes increased the money supply byover 8.5 percent.[8 ] No absolute inflation occurred because the banknoteswere offset by the manifold forces draining the currency mentioned earlier. Second, the function the Bank was toassume in relation to the national debt, although not anticipated duringits planning stage, was inherent in the political situation it faced duringits formative years. This state of affairs was a major impediment to economic growth. Interest and participation inprivate lotteries and tontines exploded; eventually even the governmentjumped on the bandwagon, sponsoring a number of public lotteries as a meansof financing the war effort.[13] Such a digression was clearly of nobenefit to the economy as a whole. Any organization hoping to replacethem in their more daring functions (especially large-scale private andpublic lending) would have to construct a public image which carefullydistanced the new bank from what the public perceived the goldsmiths'shortcomings to be. B. It called for issuing fully transferableinterest-bearing notes, in standard denominations, for money invested ordeposited. The Tunnage Act to which the provisions for the Bankwere tacked provided that the principal of the original ,1,2 , loancould be repaid by the government after 1 years, and there is noindication that it did not fully intend to do so. A genius for finance, Patersonoriginated the Bank of England scheme and sat on the Bank's first Board ofDirectors, but quit a few years later over a dispute with his associates.He subsequently turned his energies to the famous Darien expedition, ascheme to establish a Scottish colony in the isthmus of Panama. [4 ]These are still extant in Scotland's National Library. And the Bank's ability to reconcile the London monied classeswith the government came at the opportune moment to allow the war withLouis to continue. Paterson wrote that as to the Security of the Bank, for such as may intrust their effects therein, it will be clear and visible, and every way equal to . A significant number of financial authorities, led byTreasury Secretary William Lowndes, became convinced that an expansion ofthe money supply made possible by a devaluation of the coinage (that is,putting less than a shilling's worth of silver into each shilling) wouldprovide the inflationary boost which would lift the economy out ofstagnation and allow the government to continue the war effortsuccessfully.[74] The opposition, led by John Locke, maintained thatclipping was the sole source of the problem and that devaluation wouldwreck England's financial stability; it felt that recoinage with millededges but along the same standards was the only step prudent ornecessary.[75] The latter viewpoint won out. [55]An Humble Proposal, Whereby His Majesty May Raise and Extend HisCredit to the Annual Value of His Revenue, Without Interest or Damage tothe Kingdom (London, 1673), 6. 16-26. BibliographyAcres, W. Thatit assumed the fortuitous role it subsequently did was an added boon andnot the raison d'etat behind the Bank's foundation. Publick Banks are of so great a Concern in Trade, that the Merchants of London, for want of such a Bank, have been forced to carry their Cash to Gold-Smiths, and have thereby Raised such a credit upon Goldsmiths Notes, that they pass in payment from one to another like Notes upon the Bank; and although by this way of credit there have been very vast sums of Mony lost, not less than too millions within five and Twenty Years, yet the Dispatch and Ease in Trade is so great by such Notes, that the Credit is still in some measure kept up.[22]Several important points are raised by this passage. . [21]Nicholas Barbon, A Discourse of Trade (169 ), A2. This is a method so Insecure, and Impolitick, that one may equally wonder, that Men could hope to Impose such Things upon the Publick . Godfrey developed this themefurther, writing that "those who lodge their money in the Bank have it asmuch at their own disposal as if it were . The Bank was the result of intellectual debate,historical experience, political maneuver, social conflict, and economicnecessity. In 1691 the Bank was first proposed as anemergency revenue-raising measure; a poll tax was decided upon instead.The Bank plan was raised a If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.