History of the Bank of England and its financial services to the state

Table Of Contents

Page.

Introduction by H. S. Foxwell 5

Preface; to first edition 23

PART I. The Foundation of the Bank of EngIvAnd

I. The development of English economic organization during THE SEVENTEENTH CENTURY, WITH SPECIAL REFERENCE TO THE LOAN SYSTEM 43

II. Public credit before the foundation of the bank 55

III. The foundation of the Bank of England, and its statutory RE1.AT10N TO THE state 68

PART n.

The Relations between the Bank and the Administration of THE Public Debt, and of the Public Money during the Eighteenth Century 78

The evolution of the national debt and of its administration .

A. The principle of the incorporation of public debt as recognized

at the foundation of the bank, and its subsequent application :

1. The principle of incorporation 80

2 . The attempt to establish a land bank 84

3. The East India Co 86

4. The South Sea Co 91

B . History of the exchequer bills and their importance in the sys-

tem of public debt 96

C. The administration of the national debt by the companies:

1. The distinct characters of the companies iii

2. The development of the forms of debt 113

3 . The connection between the companies and the manage-

ment of the public debt 123

(a) The East India Co 125

(b) The South Sea Co 125

(c) The Bank of England 132

4. The duties involved in the management of the debt and

the indemnity paid by the State 137

II. The administration of public money and the bank's share

therein 143

I. The central financial authorities— the treasury and the

exchequer 145

II. Thb administration op pubuc money and thb bank's share

THEREIN — Continued. Page.

2. The position of the receipt offices and the exchequer. ... 152

3. The right of assignment 160

4. The administration of money by the pay departments. . 164

5. The transactions between the public office and the bank . 175

PART m.

The Legal Development of the Relations between the Bank AND THE Administration of the Public Debt and Public Money.

I. The bank and the administration of the public money.

1. The reforms in the administration of public money be-

2. The union of the public treasury with the bank (1834). . 190

3. Reforms in organization and administration between 1834

II. The bank and the organization of the public debt 210

PART IV.

The Present Position of the Bank as the Financial Servant

op the State 220

I. The bank as manager of the public money.

1. The concentration of the public revenue in the bank 222

2. The exchequer account 225

3. The paymaster general and his accounts 231

4. Provisions for covering the cash deficit 242

5. Methods of payment 244

6. The control over money transfers 249

II. The bank as the office for the management of the public

Conclusion 261

Appendix I

The statutory basis of the position of the Bank of England in the English economic system 271

Appendix II

The settlement of the national land bank 281

Appendix III

The present forms of the exchequer bills, treasury bills,

and exchequer bonds 285

Appendix IV

Average amount of the public deposits at the Bank of

England 288

Appendix V Bank act, 1892 290

Introduction

H. S. FoxwEiyiv.

The work of Professor Philippovich here translated is a recognized economic classic. It owes this position to the importance of its subject and the thoroughness and accuracy with which the distinguished author has handled it. The position of the Bank of England is so exceptional that its history must always be of peculiar interest ; and this more especially in so far as concerns its relations to public finance. For this Bank was, above all others, perhaps, in its origin and development, emphatically the servant of the State. Arising out of a State loan, it was cradled in a Ways and Means Act dealing with the tonnage duties imposed to provide interest on the loan; and in early days was nicknamed the " Tunnage Bank."

At the outset the Bank of England had no other statutory relations to the State; in fact, special provision was made to limit its services to those authorized by Parliament. Even its banking monopoly was not conferred by the original charter. Starting without a monopoly, it obtained its privileged position by its unfailing loyalty to the Government; just as the Bank of Scotland, which started with a monopoly, lost it in 1727 by its suspected affection for the interest of the Pretender. Thus the different attitude toward the State of the two contemporary banks, carrying with it differences of privilege, determined the difference in the national systems of banking in England

National Monetary C ommis s io n and Scotland, a difference which reached its extreme about a century ago. The nineteenth century has seen the struggle between these two types of banking end in the complete victory of the Scottish type. The issue is still a live one in the United States; but in the United Kingdom it may now be said that, for good or ill, the large branch bank has completely ousted the small local bank. In all probability this result would have come about at least a century earlier but for the close connection between the Bank of England and the State.

But though the Bank of England was at its origin rather an incident of State finance than the foundation of a national banking system, its services to the State were very narrowly restricted by statute. It is curious to note that those exchequer functions which it afterwards undertook, and whose gradual assumption it is the principal object of this book to trace, are not even referred to in the original act and charter. The fact is that the Bank of England, like most really English institutions, was casemade; it owed its form and functions not to systematic planning, but to attempts to meet emergencies as they from time to time arose. Thus the "running cash note," which afterwards became the most effective banking instrument of the English bank, was an evasion, even if not (as often alleged) a positive infraction of its charter. The charter only contemplated an issue of ''sealed bills," strictly limited in amount to the capital subscribed. If this was so with its banking methods, it was equally the case with its relations to the Exchequer.

The connection of the Bank with the public revenue, as Professor Philippovich clearly shows, grew up informally long before it received legislative recognition. It can not be said, however, that the matter was altogether overlooked at the foundation of the Bank. As usually happens in times of national crisis, when the public mind is deeply stirred, the air was full of constructive schemes, and almost every conceivable form of public bank had active and able advocates. "Banks swarm ever3rwhere," writes I/'Hermitage, referring to the numerous projects in 1695. Among the various types then proposed there are of special interest : The State Bank, owned by the State ; the National Branch bank of the type of the present Banque de France; and the Bank of London, or City Bank, under the management of the Corporation. The first and last of these were at the time inadmissible. The credit of neither State nor City of London would have commanded general confidence. It is to be observed that contemporary writers always spoke of the Bank of England as resting upon Parliamentary, not State, secinrity; that is, upon an income definitely secured by the Parliament upon the yield of particular taxes. The Crown might have had more to say in regard to a State bank. Moreover, the authorities of a State bank might have sacrificed both the national trade and the stability of the Bank to exigencies of State. A board of merchants representing private proprietors was less likely to make this mistake. No doubt a city bank, resting like those of Amsterdam and Hamburg on the guaranty of the Corporation, might have been trusted to promote commercial interests. But the credit of the City of London in 1694 was at its lowest ebb. The Chamber of London, classed in 1650 with the Bank of Amsterdam as an example of the highest kind of security, had recently "fail'd to the Ruine of many thousands of all Ages and Ranks." They had been obliged to apply to Parliament in 1693 for "means of satisfying the Debts due to the Orphans by their Orphans Fund," which was then some £600,000 in default. A bill was prepared to provide certain local dues for this purpose, and passed into law June, 1694. The extremity to which the city was reduced may be judged from the fact that they paid Speaker Trevor a bribe of i ,000 guineas to secure the passing of this bill, no less a man than Sir John Houblon, afterwards first governor of the Bank of England, being a witness to the transaction. The bribe was discovered later, and the Speaker expelled from the House. The whole business left the Corporation gravely discredited. '^

It is not so clear why the third type of bank did not receive more consideration. This, whether under State or private management, was to be a National, rather than a London bank, and to have branches in every important town. It was argued in favor of this plan that it would give a much more general stimulus to industry and trade; that it would tend to prevent their undue concentration in the Metropolis (Bristol was greatly concerned on this point) ; and that it would furnish invaluable facilities for remittance, practically doing away with internal exchange rates, then very burdensome. Numerous proposals had been made for a bank of this type, most of them anonymous. Those by Daniel Beeckman, by John Gary of Bris-

o " The poor Orphans sufferings are still fresh in Memory," says the author oi Anglice Tutamen, in 1695.

tol, the friend of Locke, and by Daniel De Foe were distinctly able and well worked out. Most of the projectors laid stress upon the great services such a national bank might render to the Exchequer, in the collection of the revenue, and by preventing the loss sustained by the State through idle balances. Cary was more concerned for the effect on trade. "Banks, as I humbly conceive," he writes, ''ought chiefly to be calculated for the use of Trade, and modeled so as may best content the Traders."

But it was otherwise decided. At this time the purely financial interest dominated. The trading and coimtry interest was to a large extent sacrificed, and administrative facilities were not considered. It was nearly 150 years before the country had an adequate system of banks, such as might have been founded in 1694, i^ one or other of these proposals for national banks had been accepted. The administrative economies possible in the system of public receipts and payments were postponed to the more urgent problem of obtaining money to pay. As our author shows, the engrafting of Exchequer business on the Bank grew up gradually, almost by accident; possibilities of this sort were not taken into account in deciding on the form to be given to the Bank.

It must be admitted that the State did pretty well for itself. It derived substantial advantage from the Bank, not only in the great emergencies of William's reign, but from time to time afterwards, and notably on the occasion of Charter renewals; this too, without depriving the Bank of its private character, and its

National Monetary C ommis s to n responsibility for losses. This, again, is characteristic of English methods. The State prefers to exploit private enterprise, rather than to engage in enterprise itself. ''Heads I win, tails you lose," is its attitude toward private business. Considering how small is the chance that the State will ever make any profit on its own account, the attitude is not unwise.

The question of Exchequer methods, however, deserved attention; and its importance had already been realized by the English people. Whenever a great central bank acts as an Exchequer, even if its range is only metropolitan, there must be a great economy in the use of money. This was carefully pointed out by many writers of the time. They could remember the gross abuses of the time of Charles II, when the receivers lent balances to the goldsmiths long overdue to creditors of the State, while the unhappy creditors were forced to go to these very goldsmiths to borrow back their own money at usurious rates. Down to a much later period, large fortunes were made by revenue officials at the expense of the State. Occasionally we come across complaints which have a more modern ring. The large balances in the hands of receivers of the revenue are alleged to have caused a scarcity of money in the market. But as a rule the receivers banked or lent their money; it was their obvious interest to do so. The money was therefore not taken off the market, as is the case when public moneys are held by an independent, non-banking, treasury. Still, if there had been time for fuller consideration, the question of the relation of the Bank to the Treasury might well have received more thought. The Bank zo was not only willing, but anxious, to undertake Treasury business.^ If their suggestions had been acceptable to Parliament, great advantages of economy and accoimtability might have been secured from the very foundation of the Bank, which, as a matter of fact, were only completely realized by an evolution extending over more than a century and a half.

In 1806, when the constitution of the Bank of France was imder discussion, this evolution was so far complete that the greater proportion of revenue payments were made through the Bank of England. It is interesting, therefore, to consider the grounds on which Napoleon, with the English experience before him, concluded that the French Bank should not undertake Treasury business. There is a graphic account of the discussions on this question between Mollien and the Emperor in MoUien's Memoires (especially Vol. I, pp. 292-315, and Vol. II, pp. 50, etc.). It is pretty clear that the Emperor allowed himself to be persuaded by Mollien against his own convictions. The Emperor wished to see the Bank of France undertaking the custody and remittance of the revenues, and provided with branch offices throughout the country, Mollien 's attitude was critical and ultra-cautious. He seems to have feared that the Emperor would have made the Bank a mere engine of State finance. Previous banks of France had been wrecked by the demands of the State,

oSee An Essay upon the National Credit of England, I'jod: "It has been said that they would give a Million of Money for this Privilege, which has never yet been granted, but expressly prohibited by the Parliament, (excepting for a small time and in an extraordinary case), though some think there are means found out, in a great measiu'e, to evade that prohibition" (p. 11). The surmise was not far wrong.

II and the Bank of England itself had only narrowly escaped disaster from the same cause more than once in its career. lyOgically, of course, there was no necessary connection between an Exchequer agency and advances to the State; but it would be hard to say that in practice the former might not be made a pretext for insisting upon the latter. Mollien's account of the conflict of opinion thus arising is of almost dramatic interest. He says that the Emperor had often conversed with him about the Bank he had just established ''sous le litre pompeux de Banque de France.'' The Emperor had the highest expectations of this Bank. Mollien was as cold on the subject as the most severe doctrinaire of the "Guillaumin school" could be. The Emperor asks him if he still maintains his spite against the Bank. Mollien replies by tendering him a carefully prepared paper setting forth his views. Much of this deals with points in the charter, to which he raises sound objections. The French Bank ought to have paid for its monopoly, as the English Bank did. Instead, Government was a shareholder in it. If at the start the Government did the Bank some service in subscribing these 5,000 shares, it would now be doing it a greater service if it would free it from the tutelage of such a shareholder, who, sooner or later, might become suspect. It was because the English Government was scrupulously careful to fulfill all the obligations with which private debtors had to comply that it was able, without endangering the Bank, to obtain assistance from it. The English Bank made payments and discounts for the Government just as for private firms who had opened accounts with it. The English Bank also collected certain portions of the public revenue, and especially those pledged for the service of the debt; but it was rather as ''Grand syndic des creanciers de VEtaV than as Government agent that it made these collections. The State no longer had the disposal of these revenues, because they had been made over to its creditors; and it was to emphasize the unqualified character of this assignment that the duty of collecting directly from the public receivers the corresponding amounts was imposed on the Bank. Moreover, owing to the fact that the bulk of the English debt was in the hands of large holders, who kept accounts with the Bank, the payment of interest was a very simple matter. It would be otherwise in France, where the average holding in 1806 was only 450 francs.

Mollien goes on to urge that the new French Bank can not be usefully compared with the English Bank, resting as the latter did upon a century of success. England, he says, is perhaps the only country where the creations of credit enjoy so wide a currency that artificial money itself does not degenerate into paper money. He thought that the real guarantee of the English paper w^as neither the shareholder's capital nor the securities held by the Bank, but the immense mass of goods stored in the country. Napoleon here interposes his own explanation. He sums up the matter in an admirable phrase, worthy of his genius, which exactly hits the mark: ''People have sense enough to understand that bank notes are not paper money. ' ' These half dozen words exactly express the position maintained four years later by the Bank of England against the Bullion Committee, and form the best answer to the innumerable schemes for Government

Banks of Issue so constantly put forward. Government paper is forced out in payment of the limitless expenses of the State. Bank paper, whether bank notes, as in those days, or checks to-day, is issued against, and more or less limited by, soimd and well-seciu'ed commercial credit. Bank paper is normally convertible; State paper always tends toward inconvertibility. It was a soimd instinct that led England in 1694 ^^^ France in 1800 to make their public banks commercial companies instead of departments of State.

To return to the question with which we are here mainly concerned, it would appear that the Bank of France in 1806, like the English Bank a century before, was not unwilling, while retaining its independence, to undertake a large part of the Treasury business. It is not quite certain how far the governor, Cretet, represents the views of the proprietors, because in 1806, for the first time, the governor of the Bank was appointed by the Emperor, and Cretet therefore presided as Napoleon's nominee. But in the discourse which Cretet made to the general assembly of the Bank Direction on the 13th of May, 1806, we find him a pronounced advocate of closer relations with the Treasury. He expresses the hope that the Treasury may be willing to concentrate in the hands of the Bank revenue services now distributed amongst so many intermediaries, estimating the economies which would result from such a centralization at from 3,000,000 to 5,000,000 francs per annum. He even congratulates the Bank on having secured a State lottery agency, promising little profit, because it may lead to more important connections. This, of course, was precisely what Mollien feared. So anxious was he to prevent any advance in this direction that, against the advice of the responsible minister, Marbois, we find him supporting a proposal for constituting the receivers-general into a bank of their own. This bank was to handle the public moneys and to make advances to the Emperor on the revenue. The proposal seems to have been adopted. The circulation of short Treasury paper, says Mollien later, is intrusted to the receivers-general. For the time, therefore, Mollien had his way.

It is doubtful whether Napoleon was really convinced by Mollien's arguments, but he had a high esteem for him and may have thought that there were grounds for caution. After listening to Mollien, he sat silent for a few minutes and then observed: ''The world is old; we should profit by its experience. It teaches us that ancient practice is often worth more than new theories." In one way or another, Napoleon is brought to say, in the end, that " the one thing that seemed clear to him was that there must be no alliance between the business of the Treasury and that of the Bank." But if he thus adopts Mollien's policy, it must of course be for reasons of his own. "Amongst many good reasons, one had decided him," he tells Mollien. ''A simple movement of public moneys often carried with it a State secret. He did not wish to increase the number of his confidants in matters of this kind." This is a reason that would appeal to Napoleon; needless to say, it was not influential with Mollien; so far as one can trace, he does not even mention it. Mollien was really afraid that relations with the Treasury would compromise the stability of the Bank. This had often been the case in the past; no one was in a better position than Mollien to judge of the probabihty that history might repeat itself in the France of his day. Yet Napoleon's ideas were in the abstract sound enough, and the later history of the Bank of France has justified him. The Bank now has, as he desired, branches in every department, in fact in every important town; and the Treasury makes large use of its admirable organization for the service of the revenue. The Bank of France, in fact, keeps the Government account.

The classical case of the Second Bank of the United States, where a public bank, actually discharging these exchequer functions, was in 1834 deprived of them, presents a still stronger contrast to the history of the Bank of England. It need not be more than mentioned here, as the circumstances are so familiar, and have been so exhaustively chronicled. It is possible to insist too much on these international parallels and contrasts. No two coimtries can be strictly compared in a matter of this complex character; each case must be carefully considered with reference to all the pertinent political and economic conditions. Perhaps the analogy is closer between the English and French banks ; but even here it would not do to attempt to draw general conclusions from the divergent policies adopted. The chief use and justification of such comparisons is their tendency to stimulate further inquiry.

As far as the Bank of England is concerned, there is little to be added to the very complete account of the history of its relations to the State given by Professor Philippovich. That account is brought down to the year 1885. The only changes requiring note since that date are those ffected by the 55 & 56 Victoria, C. 48, usually known as .ne Bank Act of 1892. This act is printed in an Appendix to this volume. It made a new adjustment of the payments due to the Banks of England and Ireland for the * management of the debt, in which was now included the local loans stock (municipal) and the guaranteed land stock (Ireland) . It was a natural time for a reconsideration of the question. The great conversion of the national debt had been successfully carried through by Mr. (afterwards Viscount) Goschen in 1888 and 1889. Both banks had given invaluable assistance in the operations. Sir E. W. Hamilton, in the official account of the conversion, writes that "the labour which the attainment of such results imposed on the Banks of England and Ireland was, as can readily be imagined, prodigious; and nothing short of perfect organization and untiring zeal could have enabled those establishments to grapple with it." To give some idea of the magnitude of the necessary operations, he mentions a number of interesting particulars. From these we learn that the total number of accounts of holdings inscribed in the books of the Bank of England was 169,235, ''which varied in amount from £5,760,000 to the curiously small sum of i penny." Three hundred and eighty-seven millions odd of Consols and Reduced Threes were converted by the Bank of England. The Bank staff had to be largely increased, and during some weeks 100 men worked until II p. m., and 50 throughout the night. Difficulties of identification and verification of agency were specially great. "In spite of the immensity and the intricacy of the work, no mistakes were committed ; no delays occurred ; scarcely a complaint against the banks was preferred."

The remuneration received by the two banks was £101,541 15s. I id. — £98,248 2d. to the Bank of England, £3,293 15s. 9d. to the Bank of Ireland; a small part of the total expenses of the conversion, estimated at £1,294,142 1 6s. 7d. This expense, together with the cost of an additional quarterly dividend, due to the change from half yearly to quarterly payment, was almost wholly defrayed out of the surplus revenue for the year 1888-89. The work in connection with the redemption of unconverted stock was much heavier, in proportion to the amoimt handled, than the work of conversion itself. For this the Bank of England received £14,01 1 i is. i id. and the Bank of Ireland £500. Thus the Bank of England received about £112,260 for its services in the double operation. The payment was undoubtedly well earned.

The national debt had thus changed its form, and the dividend upon the whole of it was now paid quarterly instead of at alternate half-yearly periods on the two portions, as before. Moreover, the dividend upon the debts of the State to each Bank (£11,015,100 and £2,630,769 4s. 8d., respectively) was also in futiure to be subject to the terms of the Conversion Act. These changes made it fitting to reconsider the pecimiary arrangements between the Government and the Bank for the service of the debt. These arrangements had been revised by Mr. Gladstone in 1 86 1, when the payments to be made by the State were reduced by some £50,000 a year. The terms of the existing arrangement will be found in the printed act of 1892. They are not subject to revision until March, 191 2. They involve a further saving to the State of £45,700 a year.

Reference will be noticed in the act of 1892 to a possible supplementary charter. This charter was applied for in due course, and bears date August 19, 1896. It deals exclusively with what may be called the internal affairs of the Bank; and for this reason, perhaps, does not appear to have been published. It seems to have been granted in reply to a petition from the Bank, stating that much inconvenience was caused in various respects by certain provisions of the old charter. The new provisions substituted give the Bank greater freedom in matters relating to its internal government. The only one which seems to concern the public is the first, dealing with the re-election of directors. By the first of the acts which conferred the bank monopoly, the 8 & 9 Wm. Ill, c. 20 (1697), it was enacted (sec. 52) "that in all future elections of directors there shall not be chosen above two-thirds of those who were directors the preceding year." This provision does not seem to give adequate guaranty of due experience or continuity of policy in the bank direction. The Bank petitioned against the clause March 26, 1697, but it was adopted by the House in spite of their protest. There was at that time a widespread fear lest the power which their position gave to the directors might result in favoritism or trade monopoly, and this may have influenced the decision of the House. No fiuther statutory change appears to have been made until the passing of the act (55 ^ 36 Vict.,c. S4', July 18, i8'j2) An act to amend the law relating to the election of directors of the Bank of England. This provides that " section 52 of the act, 8 & 9, Wm. Ill, c. 20 (which section relates to elections of directors of the

TO

Bank of England) shall have effect as if seven-eighths had been therein mentioned instead of two-thirds." By the Bank Act of 1892 it was provided that the act of 1872 (with other acts scheduled) should be repealed as from the date of the supplemental charter, if granted and accepted. Accordingly the rule now in force is that laid down in the first clause of the supplemental charter. It reads, " If a byelaw made by a General Court of the Bank of England so provides, such proportion as is fixed by that byelaw of the existing directors of the Bank of England shall not be eligible for re-election at the then next annual election of directors." What the actual effect of this curiously worded clause will be it would be idle to speculate; it seems to leave the matter wholly at the discretion of the Bank court. The question has only an indirect relation to the main subject of this work; but as the charter is mentioned in the act of 1892, it was thought that these brief explanations might be of interest.