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The Bank of England is the central bank of the United Kingdom. Its development and that of the English banking system has become the model for many other countries.[1]


Banking in the modern sense originated in about the middle of the seventeenth century, when merchants took to depositing their balances of coin and bullion with the goldsmiths. The goldsmiths began to offer interest on deposits, since they could re-lend them at higher rates, and the receipts they gave in acknowledgment of the deposits began to circulate as money. And so arose a number of small private firms, all having equal rights, and carrying on the issue of notes unrestricted and free from Government control.[1]

Early history[]

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

The Bank of England went bankrupt after two years of operation, in 1696, and survived because of government granted suspension of payments. The English Crown remained its main customer and granted additional privileges, such as legal protection against the competition of other banks.[2]

The extensions of its charter often "coincided with the grant of additional loans to the State",[3] and the initial limits on the activities of the Bank and the sums it could borrow to the crown were over time repealed. The accumulating privileges gave the Bank of England a position of prestige and influence in the financial world, and smaller banks had difficulties to compete in the same lines of business. In London was the majority of private note issues abandoned by about 1780. The smaller banks began to keep balances with the Bank of England, which was already beginning to acquire the characteristics of a Central Bank.[1]

The modern form of central banking was established by the Peel Act of 1844. The Bank of England was granted an absolute monopoly on the issue of all bank notes in England. These notes, in turn, were redeemable in gold. Private commercial banks were only allowed to issue demand deposits. This meant that, in order to acquire cash demanded by the public, the banks had to keep checking accounts at the Bank of England. In effect, bank demand deposits were redeemable in Bank of England notes, which in turn were redeemable in gold. There was a double-inverted pyramid in the banking system. At the bottom pyramid, the Bank of England, engaging in fractional-reserve banking, multiplied fake warehouse receipts to gold—its notes and deposits—on top of its gold reserves. In their turn, in a second inverted pyramid on top of the Bank of England, the private commercial banks pyramided their demand deposits on top of their reserves, or their deposit accounts, at the Bank of England.[4]

Later history - a timeline[]

Year: Events:[2][1][5]
1694 Foundation of the bank and a loan to the government
1696 Suspension of payments
  • Renewal of charter, loan to the government
  • Limited liability privilege
  • Extension of note issue
  • Monopoly cashier of payments to the government
  • Renewal of charter and a loan
  • Monopoly on joint stock banking with more than six partners
1713 Renewal of charter and a loan
1742 Renewal of charter, loan to the government without interest
1751 Monopoly administrator of the public debt
1764 Renewal of charter for a fee paid to the government
1781 Renewal of charter and a loan to the government
1793 Legalization of short-term loans to government beyond statutory limitations, loan to the government
1795 Authorization of £5 notes
  • Authorization of £1 and £2 notes
  • Run on the bank, suspension of payments, a loan to the government
1800 Renewal of charter and a loan to the government
1812–19 Bank of England notes are legal tender, further loans to the government
1821 Resumption of payments in gold after wars with France
1825 Lending to country banks in crisis, re-issue of £1 notes
  • Joint stock banks permitted outside of London
  • Bank of England authorised to set up branches
  • Prohibited issue of notes lower than £5
1833 Bank of England notes become legal tender for sums above £5
1839 Liquidity crisis, received credits from the Banque de France (£2,000,000) and from the Hamburger Bank (£900,000);[6]
1844 Peel Act, monopoly of note issue in Great Britain, loan to the government
  • Bank of England notes are legal tender
  • Suspension of payments, loans to the government
1931 Abandonment of the Gold standard
1946 Nationalisation

The Scottish Exception[]

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

The private banks, however, could operate freely as long as the shareholders accepted unlimited liability for the debts of their banks. Banking was soon dominated by a number of companies of considerable size and financial strength. The system was distinguished by keen competition between the banks and a strict practice of regularly clearing each other's notes (exchanges were made twice a week and balances immediately settled). They quickly adopted branch organisation, and there was, as compared with other countries, a much more rapid growth of deposit banking and development of loan technique. The highly developed Scottish banking, free from legislative interference, has inspired many proponents of free banking.[7]


  1. 1.0 1.1 1.2 1.3 1.4 Smith, Vera C. "The Rationale of Central Banking and the Free Banking Alternative", Chapter II - The Development of Central Banking in England, online version, referenced 2009-07-30.
  2. 2.0 2.1 Jörg Guido Hülsmann. "The Ethics of Money Production", online version, Chapter 15. Fiat Monetary Systems in the Realm of the Nation-State p.199-203, referenced 2009-07-30.
  3. Great Britain. Committee on Currency and Foreign Exchanges, Great Britain. Committee on Finance and Industry. "British Parliamentary reports on international finance", online version, referenced 2009-08-02.
  4. Murray N. Rothbard. The Case Against the Fed (pdf), referenced 2010-05-10.
  5. Bank of England website. History, referenced 2009-08-03.
  6. Jörg Guido Hülsmann. "The Ethics of Money Production", online version, Chapter 10. Legal-Tender Laws p.143, referenced 2009-09-19.
  7. Smith, Vera C. "The Rationale of Central Banking and the Free Banking Alternative", Chapter III - The Scottish System, online version, referenced 2009-08-03.

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