BANK OF ENGLAND

Hawera & Normanby Star, Volume XLI, Issue XLI, 15 October 1921, Page 9

BANK OF ENGLAND

AN INTERESTING SHORT HISTORY

The following history of the Bank of England, though written in 1006 by Mr. Geo. Mackenzie, of the British Linen Company Bank, North Leith, should make anteresting reading in these days when so much is being said of banks and their functions: —

The Bank of England dates from the year 1694. The circumstances that led to its foundation are well known. The

war which William 111 waged against France drained the resources of the

Government, and its credit had fallen so low that it failed to raise the funds

necessary for the war supplies which were eagerly voted. The foundation of tho Bank of England was the outcome of a scheme devised by William Paterson 6v Scotsman who is famous

for his connection with the disastrous

Darien scheme), whereby come forty wealthy London merchants lent to the Government the sum of "£1,200,000. In exchange for this they iV>eeived certain privileges, under a charter granted on July 27, 1694, to the "Corporation of the Governor and Company of the Bank of England." At its inception, therefore, the bank was simply a company of subscribers, who lent their capital of £1,200,000 to the Government at 8 per cent, per annum, and who in return were allowed to carry on the operations of banking, including the issuing of notes to the extent of the capital subscribed. From such a humble beginning has sprung the great institution, which is the centre of the world's finance. Although it was established by Act of Parliament and still carries out the official business of the nation, it has never been a Government institution.

For the first eighteen months of its existence the bank was in a flourishing condition. Its success led to the promotion of a rival concern, called the Land Bank. The failure of this'institution threw the finances of the country into such confusion that the Bank of England had to declare a partial suspension of payments. In 1697 its charter was renewed and its capital was increased by new subscription, the directors being allowed to issue notes to the extent of the increase.

The political tfoubles at the beginning of the century placed the bank again in difficulties, and its capital was again increased, the same privilege of issuing notes being attached. By the Act of 1709 the bank was granted a^ monopoly of joint stock banking in England, and, further, private firms were not allowed to consist of more than six partner*?. In 1720 the bank had to face a powerful rival in the notorious South Sea Company. From the struggle the bank emerged victorious, the "South Sea Bubble," as is well known, proving* a most disastrous affair for the nation. Up to the year 1722 the bank was in | the practice of dividing the whole of its profits among the shareholders, the dividends varying from 6 per cent, to 18 per cent. In 1722 the reserve found to provide for contingencies was inaugurated. Notes for £10 were first issued in 1759. none below £20 having been issued previous to this date. The monopoly of joint stock banking enjoyed, by the bank led to the formation of a great number of small banks throughout the country. These indulged in reckless operations, and in the1 crisis of 1797, which followed the declaration of-war against France, hundreds of these banks stopped payment. So acute was the -distress occasioned to the country that for the' first time since its foundation the bank had to totally suspend c«jK payments. -A i succession of bad harvests, the heavy taxation caused by Ihe war,, and speculation of every description* caused such a convulsion of trade that the bank did not resume full .cash payments 8 unJU 1821

In 1826 the branch -system was commenced. Between 1826 and 1829 eleven branches were established in the provinces, four of which have been witb> drawn. .Several times, in the year,s following this period the bank was subjected to severe pressure,- In 1836 the speculative fever broke out again, trade became thoroughly disorganised^ and the bank-was only saved from stopping payment by negotiating foreign loans at Paris ..and Hamburg to the extent of £3,500,000. These constantly recurring panics led to the appointment of a committee to inquire into the whole currency system. The outcome of their investigations was the Bank Act of 1844, the Magna Charta of English banking, under the principles of which the bank is still administered.

At this point we may revert to a most important development which took place in banking conditions in 1826. In that year the monopoly enjoyed by the bank was removed, and joint stock banks could be established in England at a. grater distance than, eixty-five miles .from London. About the same time it was discovered that the bank's charter did not forbid the formation of banks in ■ London which did not issue notes. The formation of the London

and Westminster Bank, in 1834, followed by similar establishments, met with much opposition from the bank, but despite all its efforts it found its monopoly was gone as far as competition is concerned. It still retains the privilege of exclusive issue in and within sixty-five miles of London.

The history of the bank, therefore, now enters upon a new era. Hitherto it had been the one powerful establishment in the country. Now it had to face powerful rivals. But it still carries outthe financial transactions of the Government, and under the Act of 1844 it has remained the centre of the credit system of the country. •, Briefly, the principles of the Act are as follows:— (1) The Bank of England was divided into- two departments, the issue department and the banking department. (2) Securities to the value of £14,000,----000 were to be transferred to the issue

department, along with so much of coin and bullion as was not required for the banking department. The issue department was then to deliver to the banking department an amount of notes equal to the securities, coin, and bullion so deposited with it. For any additional issue an equal amount of coin or bullion must be transferred to the

issue department. (3) No banks were allowed to commence issuing notes after May 6, 1844, and if any ceased to issue notes after that date the bank might increase the- securities in the issue department to two-rthirds of the aniount of notes so withdrawn from circulation. The total power of issuing notes is now limited to^ £18,450,000, plus the amount of bullion held by the issue department. It now became peculiarly the function of the Bank of England to regulate the currency, and Mis subsequent history is largely connected with this aspect of its operations. In the crisis of 1847. the bank was only saved from stopping: , paymenV by ths suspension of the Act! The same course had to be followed i again in 1857 arid 1866. The .experience gained in these crises has had its I effect, and down to: the present day, except for the Baring scare of 1890, the.country has been free from such' disastrous panics. From 1866 to 1890, with the exception of the failure of the City of Glasgow Bank in 1878, there is little to relate regarding the history of banking. It was. on the whole,* a period of peace and prosperity. When the firm of Baring Brothers

failed with liabilities amounting to over £28,000,000, the Bank of England invited the co-operation of the other great banks in giving assistance. This marks an important departure. For tho first time the bank was afforded the assistance of the other great establishments in maintaining public credit. We now find the bank working hand in hand with its powerful rivals, who are also its customers. During the late Boer war the bank was icharactorised by sound and able administration.

Having briefly traced the progress and development of this great - institution, H we may in conclusion enumerate the funtetions it carries out. ' It publishes every week a balance-sheet or return showing the amount of notes issued j and the securities and bullion held, jgmng in detail the liabilities and assets. On the basis of this return the rote of Interest is fixed. The bank also acts as agent of the mint, and through its instrumentality the coinage of the country in manipulated. It acts as banker for the claaring-house Ail the other banks keep a balance with the Bank of England. It conducts the management of the National Debt, paying dividends and annuities and transferring the funds. In addition to all this, it tran&acts all the ordinary businow fe^. bank- is Chequered its career has certainly been It has passed through times of great advenntv,, and has succumbed 2?f! th. an once; yet its record is an emmently honourable one. On the whole its actions were the outcome of honourable motives. It has played a nornf Ult^ art in.the fi™ncial Phf S toVy* wtle°Vorid. C°UntryOnI y' buto*S