In Felix Martin’s Book ‘Money the Unauthorised Biography’ he quotes this wonderful fact:
In 1702, just six years after the foundation of the Bank of England, in Clarke v, Martin, the Chief Justice described the still very new ‘promissory notes’ as ‘a new sort of specialty unknown to the Common Law’ and ‘invented in Lombard Street to give laws to Westminster Hall’. Two years later a Promissory Notes Act had to be passed…
This, I think demonstrates that the Bank of England was in fact a form of Public Private Partnership, where it served the purpose of giving the monarch a counterweight to Parliament where he could raise money on the collateral of future tax revenue – something the monarch was probably not actually in charge of but it gave him the possibility of borrowing privately as required and so to some extent being able to sideline Parliament.
As Felix Martin puts it:
Without the state the Bank would have lacked authority. Without the Bank the state would have lacked credit.
Moreover, it was always an experiment and very nearly failed just two years after its formation. Indeed, the Bank of England was established in 1694 as an explicitly temporary institution, which could be dissolved upon one year’s notice after the 11-year life guaranteed by its initial charter had passed. The charter was actually renewed nine times between 1694 and 1844.
Unsurprisingly, when, for example, The Bank of England charter was due to expire in 1710, there was some private competition to replace it and the Bank of England had to lower its interest rates.
This indicates that whilst both state and bank were seen to be of provisional mutual benefit the state was always in the driving seat.
And also that central banking, which is now seen as so vital to the existence of the economy was certainly not a given for a ‘successful’ economy but has, in fact, just managed to insert itself into a role that it has, with continual effort, convinced everyone to be essential.
That the state is actually, in charge is shown by the fact that, even as late as 1914, ‘Bradbury’ pounds were issued not by the Bank of England but direct by the Treasury – no central bank required.
So called ‘Bradbury’s were named after the Chief Secretary to the Treasury of the time and were issued on the outbreak of the First World War. The Bank of England described them on 25 January 2018 as follows:
The Government at the time needed to preserve its stock of bullion so asked the Bank of England to cease paying out gold for its notes. Instead the Treasury printed and issued 10 shilling and £1 notes (so called Bradbury pounds).
The gold standard was then partially restored in 1925… Britain left the gold standard in 1931 and the note issue became entirely fiduciary, that is wholly backed by securities instead of gold.”
I cannot help but point out that when describing these notes as ‘entirely fiduciary’ this is exactly what the Bank of England’s own notes now are!
Indeed the Bradbury’s text “Currency notes are legal tender for the payment of any amount” suggests exactly the ‘fiat’ nature of both Bradbury’s and today’s Bank of England’s notes.
As ‘entirely fiduciary’ I think we can say that no deficit or financial debt was required since they were not guaranteed by the sole method of the time – gold. There was also no banking required – money was issued by the Treasury direct. Bradbury’s were issued under the gold standard without being backed by gold but backed simply by the ‘fiat’ of a government promise.
It is no wonder the Bank of England mentions coyly that they were ‘backed by securities’ which I suggest means simply that they are backed by decree of the State – which should be – and was – ‘security’ enough.
But whilst all are promissory notes, Bradbury’s are Treasury notes whereas what we think of as the ‘obvious’ nomenclature of Banknotes are just those issued by the Bank of England.
And unfortunately what the Bank of England seems now to have become is not so much a method of sidelining Parliament on behalf of the monarch but of sidelining Parliament together with the rest of us on behalf of the financial sector.
Circumstances where banking is very much required.