Major Developments (2)
Calls for a National Bank in England
In England the argument for some kind of bank 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 recognised 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 whole Commercial World".
Dutch William had brought to his adopted country an understandable desire to help his native country in its war against the French and this proved to be the catalyst necessary for the idea of a national bank to be accepted, albeit grudgingly by some.
But it took a London-based Scots entrepreneur, William Paterson, to propose the scheme that eventually found favour: his first, proposed in 1691, had been rejected for several reasons. This was partly because, as he wrote in 1695, "Others said this project came from Holland and therefore would not hear of it, since we had too many Dutch things already". Under his scheme, in return for a loan of £1 million, the bills issued by his company should be made legal tender. This idea proved to be more than a century ahead of its time, and consequently unacceptable to the Parliamentary Committee.
'A Fund for Perpetual Interest': The funded National
Debt is born
After several more rejections Paterson put forward a plan for
a 'Bank of England' and a 'Fund for Perpetual Interest' although
this time bills were not mentioned. Supported by two powerful
personalities - Charles Montagu, Chancellor of the Exchequer,
who looked after the Parliamentary lobbying, and Michael Godfrey
a leading merchant who ensured the ideas acceptance in the City
- it was all but inevitable, given the Government's pressing
need for funds, that the scheme should be approved by Parliament.
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 totalling £1.2 million that were
to form the initial capital stock of the Bank of England and
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 - Paterson himself said that the Government accepted his proposal only as "a lame expedient for £1,200,000". 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.
To start with, the Bank was the Government's banker: managing the Government's accounts; managing (at some expenses to itself) the recoinage of 1696; providing and arranging loans to the Government. It was also a commercial bank, dealing in bills - the then equivalent of overdraft finance, furnishing finance for trade. It took deposits and issued notes, and with the development of the issue function it began to realise the dreams of some of the original projectors, of a Bank that would "double the Effect of out coined Money".
