From a National to a Central bank

UNIT I

THE BANK OF ENGLAND

Text A

From a National to a Central bank

From the middle of the 17^th century, England and London, in particular, buzzed with ideas – and one, which was coming to the fore, was the notion of a national bank.

In England the argument for some kind of bank began to gather momentum after the Glorious Revolution of 1688 when William of Orange and Queen Mary jointly ascended the throne of England. The political economist Sir William Petty had recognized from the example of the Dutch that successful credit-based trading could benefit a nation in many ways and help to enlarge its sphere of influence. He wrote in 1682 “What remedy is there if we have too little money? 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 commercial world”.

William Peter (1658-1710), the Scots entrepreneur proposed the successful scheme by which the Bank of England was founded. So, Paterson’s plan was accepted and the necessary Act passed. The public were invited to invest in the new project and it was these subscriptions totaling £ 1.2 million that were to be on-lent to Government in return for a Royal Charter.

The Government’s immediate motive for creating the Bank was its pressing need for money. Peterson himself said that the government accepted his proposal only “as a lame expedient for £ 1.2 million”. And for some time afterwards the Government saw the Bank in that light – renewals of its charter had to be paid for with loans, often painfully negotiated from the Bank to the Exchequer. There was little in the Act creating the Bank to hint at what it would become – certainly no suggestion of a central bank, scarcely a hint of banking at all. But the charter was enough. The Bank was big, it was incorporated with limited liability (extremely rare then) and it set out to take full advantage of this position.

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