Debt and inflation
The national debt increased steadily during the eighteenth century, from £12mn in 1700 to £850mn by the end of the Napoleonic wars. Those wars put great strain on the nation's finances and in 1797 the drain on the Bank's gold reserves made it necessary to stop paying out gold in exchange for the Bank's notes. This "Restriction Period" lasted until 1821, and during it the Bank issued £1 and £2 notes for the first time to compensate for the shortage of coin. This contributed to a general increase in prices, and there was a severe slump after the wars when financial discipline was restored. The low denomination notes also proved extremely tempting to counterfeiters, and over 300 people were hanged during the Restriction Period for counterfeiting Bank of England notes.

The Bank was not the only issuer of notes at the time. Many "country" banks, as well as banks in Scotland and Ireland, issued their own banknotes. But these country banks were prone to failure, especially in the difficult trading conditions in the 1820s and 1830s, and to meet the demand for a sound currency the Bank began, from 1828 onwards, to open branches of its own in provincial towns.

The 1844 Charter - sound money
In 1844 - 150 years after the Bank's foundation - a major step was taken to put the currency on a sound footing. The Bank Charter Act of that year gave the Bank a formal monopoly of the note issue in England and Wales, and a related measure required the Scottish banks, which continued to issue their own notes, to back these with holdings of Bank of England notes. As this measure took effect, the Bank became the sole monetary authority for the United Kingdom. But there was an important proviso. Mindful of the inflation that could result from the unrestrained issue of banknotes - the Restriction Period was still fresh in people's minds - the Act prevented the Bank from issuing new notes that were not matched by an increase in its gold reserve. The "fiduciary" issue - that is, the part of the note issue not backed by gold - was frozen at its 1844 level. And to make the status of the currency more visible, the Bank was required to publish a separate balance sheet for its note issuing activities; this separation of "issue" from "banking" continues in the Bank's accounts to the present day. The profits of the note issue were to be paid direct to the Treasury.