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Published online by Cambridge University Press: 12 September 2008
1 Participants in the debate have written extensively on the subject. Recent work includes Hayek, F. A., Denationalization of Money – The Argument Refined (London, 1978)Google Scholar; Friedman, M., ‘Currency competition: a skeptical view,’ in Salin, P. (ed.), Currency Competition and Monetary Union (The Hague, 1984)Google Scholar; Goodhart, C., The Evolution of Central Banks (Cambridge, Mass., 1988)Google Scholar, originally published under the ride, The Evolution of Central Banks: A Natural Development (Sun Tory Toyota International Centre for Economics and Related Disciplines, 1985); Rockoff, H., The Free Banking Era: A Reconsideration (New York, 1975)Google Scholar; White, L. H., Free Banking in Britain: Theory, Experience and Debate, 1800–1845 (Cambridge, 1984)Google Scholar; and Timberlake, R. H. Jr., The Origins of Central Banking in the United States (Cambridge, 1978).Google Scholar
2 The plan for a separate department to control the issue of notes and to be ‘self-operating’ was debated in 1838 and implemented in 1840. Bank of England, London, archive [henceforth BoE], Court Books [henceforth CB], 26 July 1838 and 13 Feb., 26 Mar. and 2 Apr. 1840. On the development of central banking, one might begin with Sayers, R. S., Modem Banking (Oxford, 1938).Google Scholar
3 See Lévy-Leboyer, M., ‘Central banking and foreign trade: the Anglo-American cycle in the 1830s’, in Kindleberger, C. P. and Laffargue, J. P. (eds), Financial Crises: Theory, History and Policy (Cambridge, 1982), p. 66.Google Scholar
4 cf. Collins, M., ‘The Bank of England as lender of last resort, 1857–1878’, Economic History Review, 45.1 (1992), pp. 145–53CrossRefGoogle Scholar. The term ‘lender of last resort’ is not easy to define. It can be held that it is no more than the support, indirect or direct, of ‘useful’ banks. In this sense it does not need to be a conscious or even deliberative policy. In this paper, however, it will be taken to mean a conscious attempt at management and regulation of the financial sector, for it is in these senses that the Bank itself sought to justify its actions. It must be admitted, nevertheless, that there is some ambiguity in the Bank's thinking on the position. Contemporaries and a number of recent commentators have commented on this point and it is one of the elements discussed here. For the debate on this issue see Bagehot, W., Lombard Street (London, 1873)Google Scholar; Hawtrey, R. G., A Century of Bank Rate (London, 1938)Google Scholar; Sayers, R. S., The Bank of England, 1891–1944 (Cambridge, 1976), vol. IGoogle Scholar; Capie, F. H. and Wood, G. E., Financial Crises and the World Banking System (London, 1986)CrossRefGoogle Scholar; and Ziegler, D., Central Banking, Peripheral Industry: The Bank of England in the Provinces (Leicester, 1990).Google Scholar
5 Fetter, F., The Development of British Monetary Theory, 1797–1875 (Cambridge, Mass., 1965), pp. 144–64Google Scholar; Morgan, E. V., The Theory and Practice of Central Banking, 1797– 1913 (Cambridge, 1942), pp. 75–119.Google Scholar
6 SirClapham, J., The Bank of England, 2 vols (Cambridge, 1944), vol. II, p. 433Google Scholar. R. C. O. Matthews noted many of these concerns in 1954, but with few exceptions subsequent analysis has been dominated by the London perspective: Matthews, R. C. O., A Study in Trade Cycle History: Economic Fluctuations in Great Britain, 1831–42 (Cambridge, 1954), p. 191.Google Scholar
7 Goodhart, , Evolution, p. 49Google Scholar; Matthews, , Trade Cycle, pp. 165–75.Google Scholar
8 The importance of this approach had been increased by the amendment of the usury laws in 1833. They were further amended in 1839 and repealed in 1854. Contemporary understanding of the ‘money supply’ and the possibilities of its control are discussed in Collins, M., ‘Monetary policy and the supply of trade credit’, Economica n.s. 45 (1978), pp. 2–5.Google Scholar
9 The terminal date marks the beginning of a major crisis that forced the directors to introduce far-reaching changes. The altered policy is more properly the subject of another paper. The quotation marks are intended to emphasise nineteenth-century sense usage.
10 BoE, Hull Letter Books (henceforth branch name, LB), 28 Nov. 1833.
11 These accounts were sometimes mistakenly termed ‘loan accounts’. However, security or collateral was usually only taken when banks believed that they could not keep up to the circulation maximum through the discount of bills. It might also be required if the bank in question wished to go beyond the agreed maximum. R. O. Roberts was mistaken in believing that it was a normal requirement: Roberts, R. O., ‘Bank of England branch discounting, 1826–59,’ Economica, 25 (1958), p. 231.CrossRefGoogle Scholar
12 Most banks issued their own notes and hitherto used Bank of England currency only as a reserve.
13 It is perhaps worth noting that although Goodhart's hypothesis that the central bank's monetary (macro) function was grafted on to a supervisory (micro) function might be correct in the longer term, in this period the development of these two features, in so far as they were objectives, was intended to be simultaneous (Goodhart, , Evolution, pp. 6–8).Google Scholar
14 A detailed description can be found in Pressnell, L. S., Country Banking in the Industrial Revolution (Oxford, 1956), pp. 75–104.Google Scholar
15 In addition, the Bank's monopoly of joint stock banking was to apply only within a 65-mile radius of the City of London: 7 Geo. IV c.46, 26 May 1826.
16 The government also hoped that the expansion in activity would increase deposits and thereby protect it from competitors: Clapham, , Bank, vol. II, p. 104Google Scholar. Ziegler, , Central Banking, p. 5.Google Scholar
17 7 Geo. IV c.6, 26 Mar. 1826. It is unclear whether the law was to apply to the Bank of England, but, in any event, it did not issue small notes after June 1826.
18 The legislation of 1826 is discussed in Morgan, , Theory and Practice, pp. 87–90Google Scholar, and Fetter, , Development, pp. 124–33.Google Scholar
19 Moss, D. J., ‘The Bank of England and the country banks: Birmingham, 1827–33’, Economic History Review, 2nd ser., 34 (1981), pp. 540–53Google Scholar; and ‘The Bank ofEngland and the establishment of a branch system, 1826–1829’, Canadian Journal of History, 27 (1992), pp. 48–65.Google Scholar
20 The debate about monetary theory in this period is extensive. Two schools of thought, the Currency and the Banking, disputed the roles of banknotes, capital and banks, especially the responsibilities of the Bank of England, in the operation of the economy. Although there are similarities in the more moderate positions of each school, the debates often became heated and contributed to the difficulties faced by the Bank's Governors in charting acceptable policy. An analysis of the various positions is beyond the scope of this paper; readers are referred to the excellent summaries in Morgan, , Theory and Practice, pp. 120–42Google Scholar, and Fetter, , Development, pp. 129–33, 186–94.Google Scholar
21 Not even the fact that a new parliament, elected under the terms of the new Reform Act, would sit in judgement, disturbed his equanimity.
22 Clapham outlines the debate in Bank, vol. II, pp. 121–4Google Scholar. Morgan's view that several witnesses, including Samuel Jones Loyd, Sir Coutts Trotter and Samuel Gurney, made positive comments about the Bank's policy is correct, but the praise was faint and liberally spiced with criticism (Morgan, , Theory and Practice, pp. 95–6).Google Scholar
23 John Horsley Palmer became a director in 1811, Deputy-Governor 1828–30 and Governor 1830–33. His membership of the Court lasted until 1857.
24 SC on Bank of England Charter (PP 1831–2, VI)Google Scholar, Palmer, J. H., qq. 228, 233, 239–40, 712–21Google Scholar; Richards, J. B., qq. 5081–3Google Scholar; Harman, J., qq. 2369–73.Google Scholar
25 ibid., qq. 72–95. The Rule explained that when the circulation was ‘full’, i.e. when the exchanges were on the point of becoming unfavourable, the Bank should have a specie reserve equal to about one-third of its notes and deposits. Fluctuations in the Bank's notes and deposits should thereafter be equal to changes in the level of specie held.
26 It has been argued that there is no direct evidence that the Currency school's recommendations led to the Palmer Rule. But the timing and the influence of the government over the Bank are significant. For a further discussion of this point, see Fetter, , Development, p. 132, including n. 127, and pp. 144–9.Google Scholar
27 The Chancellor submitted an outline of the government's proposals to the Court on 2 May, which allowed very little rime for negotiation.
28 The legal tender clause was less significant than Morgan suggests: Morgan, , Theory and Practice, p. 99.Google Scholar It covered notes ‘over £5’ only and consequently did not effect transactions in the country. Banknotes were, however, now used more frequently for transfers to London; a use which the Bank did not encourage. Usury prohibitions were not fully removed until 1854.
29 The changes are discussed in Fetter, , Development, pp. 156–9.Google Scholar
30 BoE, General CB, 16 Aug. 1833. The Law Officers had been asked for an opinion only after the Bill had come before the House; this was a remarkable discourtesy. The directors made one final effort when the Bill came before the Lords to have the clause removed. It failed and royal assent was given on 29 Aug. 1833.
31 BoE, Branch Bank Committee Book (henceforth BB), F 73, 18 Dec. 1833.
32 The Court, to its credit, had accepted the practice as Article 1 of Rule 32 in Mar. 1830.
33 By 1833, approximately £4 million in gold had been remitted from London alone, at the Bank's risk, to the branches, at a net loss of, £3,289.
34 This was done with the approval of the Chancellor, despite some misgivings: BoE, Court of Directors Minute Book (hereafter MB), Eb, 14 Nov. 1833. Plymouth was opened as a replacement because the dockyard guaranteed a profitable account, 4 per cent on all transactions. Its potential value to the Devon and Cornwall mining districts was not mentioned (BoE, BB, F 75–6, 1 Jan. 1834). Some salaries were reduced and several clerks were posted back to London. One other rather petty regulation demanded that any bank enjoying discount privileges should make a formal declaration of responsibility for dishonoured bills; the endorsement of bills before discounting technically carried this requirement but such a formal declaration was considered by traders to be an example of the Bank's enmity.
35 Permission had been received from Wellington and Goulbourn, the Chancellor of the Exchequer, to grant discount facilities to non-issuers (Clapham, , Bank, vol. II, p. 140; BoE, CB, Sc, 5 Jan. 1873).Google Scholar
36 The rate was formalised in 1831.
37 The Court claimed in 1833 that the cancellation of Article 1 of Rule 32 was to be seen in this light rather than as part of the search for profitability. This view of the benefits of currency management is obviously tied to a rather crude version of the quantity theory of money.
38 BoE, Liverpool LB, 1 Jan. 1831.
39 Collins, M., ‘The Bank of England at Liverpool, 1827–44’, Business History, 14 (1972), pp. 152–3Google Scholar, and ‘The Langton Papers: banking and the Bank of England in the 1830s,’ Economica, n.s. 39 (1972), p. 51.Google Scholar
40 In Liverpool and Manchester bills of exchange had been circulated as cash. For an explanation of this practice see Ashton, T. S., ‘The Bill of Exchange and private banks in Lancashire, 1790–1830’, in Ashton, T. S. and Sayers, R. S. (eds), Papers in Monetary History (Oxford, 1953), p. 39Google Scholar; Checkland, S. G., ‘The Lancashire bill system and its Liverpool protagonists, 1810–27,’ Economica, n.s. 21 (1954), p.141Google Scholar; and Collins, , ‘Bank of England,’ pp. 144–59Google Scholar. At Birmingham the branch's success owed much to the persuasiveness of the agent, Nicholls, and the ubiquitous Joseph Gibbins, a bank promoter of genius; see Moss, , ‘The Bank’, pp. 548–9.Google Scholar
41 BoE, Birmingham LB, 2, 4 and 7 Jan. 1834.
42 Gloucester had been similarly connected in its early, productive years. Then the withdrawal of the Gloucester Banking Co. account led to a rapid decline in its fortunes. At Hull and Liverpool the most useful business came from such liaisons (BoE, BB, F 130, 28 Feb. 1834).
43 BoE, Hull LB, 13 Nov. 1833.
44 BoE, Miscellaneous Letters, 17 Feb. 1835, J. R. Elsey to W. Cowell, agent at Bristol.
45 BoE, MB, Eb, 14 Nov. 1833. The respect was somewhat misplaced as the bank's managers were notorious speculators.
46 BoE, Hull LB, 18 May 1834.
47 Their fears proved well founded. Gilbart, J. W. reported in 1836 that discount had to be sought in order to keep up to the minimum: SC on Joint Stock Banks (PP 1837, XLV), q. 2059.Google Scholar
48 BoE, Birmingham LB, 2 Jan. 1834 and Hull LB, 2 Dec. 1833.
49 BoE, Leeds LB, 21 Oct. 1833.
50 At Hull the agent was reprimanded for not being energetic enough: BoE, Hull LB, 18 May 1834.
51 The funds were government deposits made prior to the quarterly payments on the national debt. The advances began to be given to London bankers in June 1829 and were first extended to Birmingham, Manchester and Liverpool in Dec. 1833: BoE, CB, Ab, 11 June 1829 and Eb, 12 Dec. 1833. The privilege was generalized the following summer: BoE, Circular Book, 14 June 1834.
52 Banks ‘at a distance’ were still allowed some privileges under articles 2 and 3 of Rule 32.
53 BoE, Circular Book, no. 24, 26 Apr. 1834. The rate to meet their notes for issuing bankers remained at 5 per cent.
54 BoE, Liverpool LB, 24 July 1834.
55 ibid., 29 July 1834.
56 These were the accounts which survived. Other contracts had been struck but many proved unworkable or undesirable.
57 Balances on the East India account began to accumulate in 1834 and reached a maximum of £4.7 million in Jan. 1837. The Bank paid interest on the funds.
58 BoE, Birmingham LB, 29 July and 6 Aug. 1835.
59 BoE, Birmingham LB, 24 Jan. 1834.
60 BoE, Birmingham LB, 29 July, 6 Aug., 2 Sept., 24 Oct., 5 Nov., 30 Nov., 1 Dec. 1835 and 5 Apr. 1836.
61 BoE, Norwich LB, 1 and 8 Dec. 1834.
62 These were bills of exchange between businesses that had partners in common. Often such bills were ‘accommodation’ and not based on real transactions.
63 Not even the breaking of the contract provoked action. Eaton, Knight & Stroud were threatened with account closure in 1835 after it was discovered that they were issuing notes other than those of the Bank of England; but nothing was done (BoE, Swansea LB, 25 July 1835).
64 BoE, Circular Book, 23 July 1835.
65 See Morgan, , Theory and Practice, p. 106.Google Scholar
66 The figures are contained in the books of the Special Discount and the Branch Bank Committees.
67 The Times, 20 03 1835Google Scholar; speech of the Governor, James Pattison, at the General Court on the previous day.
68 BoE, Birmingham LB, 27 Oct. 1835.
69 ibid., 25 Feb. 1836.
70 ibid., 8 Oct. 1835.
71 The rate rose to 4½ per cent on 23 July 1836.
72 BoE, Norwich LB, 25 Nov. 1836. This circular generalised a practice which authorised to a few carefully selected banking customers advances on long bills (six to nine months) without a promissory note: BoE, Hull LB, 24 Dec. 1834.
73 BoE, Circular Book, 14 Nov. 1836.
74 For the debate, see Morgan, , Theory and Practice, pp. 105–7Google Scholar, and Fetter, , Development, pp. 167–72.Google Scholar
Robert, Torrens had opened the attack with A Letter to the Right Honourable Lord Viscount Melbourne (London, 1837).Google Scholar
75 Palmer, J. Horsley, The Causes and Consequences of the Pressure on the Money Market (London, 1837).Google Scholar
76 Clapham, , Bank of England, vol. II, p. 156.Google Scholar
77 Goodhart makes the same point when he remarks that it was ‘a noncompetitive non-profit maximizing role that marked the true emergence and development of proper Central Banking’: Goodhart, , Evolution, p. 9.Google Scholar
