The Bank of England

"Of all institutions in the world the Bank of England is now probably the most remote from party politics and from 'financing.' But in its origin it was not only a finance company, but a Whig finance company. It was founded by a Whig Government because it was in desperate want of money, and supported by the 'City' because the 'City' was Whig. Very briefly, the story was this. The Government of Charles II. (under the Cabal Ministry) had brought the credit of the English State to the lowest possible point. It had perpetrated one of those monstrous frauds, which are likewise gross blunders. The goldsmiths, who then carried on upon a trifling scale what we should now call banking, used to deposit their reserve of treasure in the 'Exchequer,' with the sanction and under the care of the Government. In many European countries the credit of the State had been so much better than any other credit, that it had been used to strengthen the beginnings of banking. The credit of the state had been so used in England: though there had lately been a civil war and several revolutions, the honesty of the English Government was trusted implicitly. But Charles II. showed that it was trusted undeservedly. He shut up the 'Exchequer,' would pay no one, and so the 'goldsmiths' were ruined. 


  The credit of the Stuart Government never recovered from this monstrous robbery, and the Government created by the Revolution of 1688 could hardly expect to be more trusted with money than its predecessor. A Government created by a revolution hardly ever is. There is a taint of violence which capitalists dread instinctively, and there is always a rational apprehension that the Government which one revolution thought fit to set up another revolution may think fit to pull down. In 1694, the credit of William III's Government was so low in London that it was impossible for it to borrow any large sum; and the evil was the greater, because in consequence of the French war the financial straits of the Government were extreme. At last a scheme was hit upon which would relieve their necessities. 'The plan was that twelve hundred thousand pounds should be raised at what was then considered as the moderate rate of 8 per cent.' In order to induce the subscribers to advance the money promptly on terms so unfavourable to the public, the subscribers were to be incorporated by the name of the Governor and Company of the Bank of England. They were so incorporated, and the 1,200,000l. was obtained."

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Thomas Babington Macaulay

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  In 1682, the Economist William Petty asked a rhetorical question in his splendidly titled book Quantulumcunque Concerning Money. "What remedy is there if we have too little Money? Answer We must erect a Bank, which well computed, doth almost double the effect of our coined Money: And we have in England Materials for a Bank which shall furnish Stock enough to drive the Trade of the whole Commercial World." Prophetic words but at the time the practicalities complicated the issue. Aristocrats thought that a state bank with the power to create imaginary gold would give power to merchants and be a step closer to republic. Conversely many merchants admired the banks of Venice, Genoa and particularly Amsterdam, but they wouldn't trust Charles II anywhere near one so whilst he reigned the questioned remained academic. They trusted his brother and successor James II even less and their sentiment was shared by many of their countrymen who welcomed an invasion by William of Orange, the stadtholder of the Netherlands.

  William's own political position was precarious, he had long been at war with Louis XIV of France who supported James's claim to the English throne. He needed money to fight this war but Parliament had grown wary of Kings demands for money. They only agreed to sanction William as King on the condition that they controlled the nations finances. No new taxes could be raised without their approval. William was forced to look for other means to fight his war that promised to be the most expensive that England had ever fought. First he turned to London's goldsmiths who were keener on William than his predecessors and bought substantial amounts of government securities, known as tallies, but they could not provide the volume of loans required.

  A Scottish Entrepreneur William Paterson had been persuading many businessmen that pooling resources, both cash and goodwill, into one big bank would be the best way to lend to the King. If they bonded together, it would give them more security from default and they could create an enterprise that would dwarf the existing London goldsmiths. aftera few years wrangling, his application was succesful, so in 1694, the Whig Chancellor Charles Montague chartered a privately owned Bank of England as a joint stock corporation. The Bank was to raise the sum of £1,200,000 but although the subscription quickly sold out it only ever raised £750, 000. It still however forwarded the full amount of £1, 200, 000 to the Government. It was operating in the exact same manner as Goldsmiths but on a larger scale. As long as customers trusted the Bank, it could create the short fall of £470, 000 simply by printing the notes. One of its biographers succinctly explained the operations of the bank

 "it never pretended to take the deposit for any other purpose than that of trading with it. It never professed to make its issues square exactly with its coin and bullion, though, of course, it made its liabilities square with its assets, It coined .. its own credit into money"

  The bank was obviously aided by having the Government as its main customer but joint stock status was also crucial to the bank's success. It give the bank a wide base of wealthy supporters with their own businesses and customers. Also if stockholders were short of ready cash, they could sell their stock on London's burgeoning stock market. In the 1690s, there were over one hundred joint stock companies whose shares were traded in Exchange Alley, close to Lombard Street. These were informal places where anyone with any interest in buying and selling shares could meet colleagues, do business and hear the latest news. Despite its evident popularity, the stock trade had developed a rather unsavoury reputation, the term ‘stockjobber’was used largely ‘pejoratively in the seventeenth century. Samuel Johnson's dictionary defined a stock-jobber as "a low wretch who makes money by buying and selling shares in the funds." Daniel Defoe wrote an essay titled, "The Villainy of Stock Jobbers Detected." Even a Government commision expressed disaproval when they said that stockjobbers sold worthless stock to "ignorant men, drawn in by the reputation, falsely raised and artfully spread, concerning the thriving state of their stock".

  Stockjobbers were unpopular as they manipulated markets, they preyed on those less savvy and streetwise than themselves. They bought stock then exagerated stories of certain companies success, they placed stories in London's many newspapers, whispered rumours in the coffee houses of exchange alley then looked around for gullible new faces who may believe them. If they could find enough to create momentum, they would wait until prices had risen enough, then sell up and make a killing. Goldsmiths had always been the natural allies of stockjobbers, they could issue promissory notes that could be used to buy up stock at a low price and then once the stock had been resold, the debt could be cleared. Yet the goldsmiths' business was under threat by the new bank so they tried to save their necks by tring a few tricks of their own.. Initially, they had attempted to undermine it by refusing to accept its notes but the non-cooperation had little effect, the bank could not be ignored. So, they changed tack and stockpiled notes and at an opportune moment when they knew cash supplies would be in short supply, they tried to cash them all at once. The predatory run failed as the Bank simply ignored those it suspected of mischief but paid paid favoured customers.

  The tactic backfired as the Bank presented a case to the Government that competition was bad for banking as a whole . It simply argued that if goldsmiths and the bank were cutting ech others throats then nobody would have money to lend to the Government. If predatory runs like that initiated by the goldsmiths become the norm then nobody would have the courage to print promissory notes. The Bank used the furore to argue for a monoply as this letter written by a "Member of the said Corporation" elicits that "competition causes distrust and contracts credit instead of enlarging it. The Bank, to be useful to the State, must be the general repository of cash for all the inhabitants of London."

  Until then, the Government had been keen on encouraging rivals to the bank. It had received a proposition from a Doctor Chamberlain for a land bank that would issue money backed by the value of land. The proposal generated interest amonst many enemies of the Bank of England, particularly the land owning aristiocracy. However, after only a few months, Doctor Chamberlain's scheme proved to be flawed when he could not raise anything near the two million pounds that he had promised. It seemed that whatever challenge the Bank faced only made it its case stronger.

  The government was facing problems with its other sources of revenue. It could not sell any more tallies to goldsmiths and the price of existing tallies had slumped. The Bank knew that many of the tally holders of debt would agree to swap it for a chance to be part of a corporation that had influence in government and as many of them were goldsmiths it could bring rivals on board. So in a deal that seemed to suit everyone, the Bank agreed to engraft the government debt into its corporation by offering to exchane freshly created bank stock for tallies. The Government however had one condition, the bank had to pay not the current market price but the original price that was less than 80%

  To compensate, the bank hatched a novel plan. It would accept government debt in payment for 80% of the new stock but its own notes for the other 20%. Thus it would be efectively writing out credit notes for people to purchase its own stock which had the effect of artifically inflating the value of the company. The Bank was jobbing the price of its own stock upwards. Bank directors also used the inside knowledge to privately purchase government debt before the engraftment operation proceeded thus guaranteeing themselves a substantial profit.

The Government was nevertheless pleased with the engraftment of its debt, Parliament drafted a new charter (1697) for the bank including this clause.  

  "During the continuance of the corporation of the Governor and Company of the Bank of England, no other Bank or any corporation, society, fellowship, company or constitution in the nature of a bank shall be erected, established, permitted, suffered, countenanced, or allowed by Act of Parliament within this Kingdom"

The Charter granted many other benefits to the bank, if for any reason, the Bank could not redeem its notes then the Exchequer would honour the debt. It meant that although its notes were not actually legal tender, they were not fully backed by the Government. The Bank was on the way to becoming an integral part of the British establishment. It provided financial services to Government departments, it organized pay and provision for foreign wars, lent to allies and would even finance the union between England and Scotland in 1707. Jonathan Swift claimed that the whole purpose of the debt was to "fasten wealthy people to the New Government".

  Despite, this enhanced status and the privileges the bank enjoyed, it could not manage to destroy all its rivals. The bank's charter banned other banks but it did not contain a pracise definition of banking. Many other joint stock companies like the East India Company issued promissory notes as it believed they could offer promises to pay without actually being bank. Less scrupulous businessmen sought out corporations to use the legal protection of incorporation to issue promissory notes. In 1691, a goldsmith by the name of Sir Stephen Evance received a charter of incorporation as the Governor and company for Making Hollow Sword Blades in the North of England. He hired some Huguenot sword makers and built forges in County Durham but continued his Goldsmith business through the new legal entity. By the 1700s, the swordmaking was floundering and another group of goldsmiths had purchased the Sword Blade company as shell for other activities. Sir John Blunt and his partners transformed it into a finance company to rival the Bank of England.

  Blunt had noted how the Bank of England had engrafted the huge amount of Government debt into its own stock and realised that that huge companies could come into existencealmost out of nowhere. The Sword Blade mimicked the Bank of England's engraftment operations, it created fresh stock in the company and exchanged it for government debt. Blunt also saw how a few individuals could manipulate joint stock companies for their own benefit. He and his associates also repeated the actions of the banks directors, they purchased debt privately and sold it on at profit to their own company and also offered credit to others who wished to purchase. It was a subtle metho of robbing their own company. The Sword Blade Company had stockjobbing down to a fine art. Daniel Defoe noted its strength in Exchange Alley, where it had the nickname "the City's pawnbroker" and poignantly predicted that "these men men with a mass of money, which they command of other people's as well as their own, will in time ruin the jobbing trade".

  The Bank of England was not keen on anyone copying their tricks whether fair or foul and tried but failed with legal action to eliminate its competitor. When its charter was up for renewal it managed to gain another clause banning any other joint stock company issuing promissory notes. Yet, once again, the Bank's rivals refused to die, as private banks were permited to operate as long as they had no more than six partners. They could also informally combine with joint stock companies to create syndicates of considerable power. Two of Blunt's associates Caswall and Mount formed a private partnership that assumed the Sword Blade's name and custom.

  In 1710, a general election returned a new government that had inherited the debts that had accumulated over the previous twenty years. During the war with France, the Royal Navy had paid its sailors with tickets instead of money on the promise that they would be redeemed at some point in the future. As this moment was long in arriving, sailors were frequently reduced to selling these tickets for half their face value. In this manner, Parliament had accumulated nine million pounds worth of debt that it could not account for by taxes or other means. The new government was not well disposed towards the Bank of England. Instead, it incorporated a new company that was controlled by the Sword Blade syndicate. It was known as The South Sea Company but contrary to its grandoise name, it conducted almost no trade in the South Seas. It did however manage to engraft nine million pounds of government debt into its own stock. It may have only sent a solitary ship to South America to trade every year but it held more Government debt than the Bank of England. Nine years later it was to embark upon an even bolder project that would make its name ever notorious.