BANKING IN EUROPE 1. Bank of England.—Like many other banking institutions, the Bank of England had its origin in the needs of the state. It was established in 1694 chiefly for the purpose of assisting the fiscal opera tions of the government, which was badly in need of money on account of the war with France. Taxes of all sorts had been levied, but it was very difficult for the government to borrow because of the confisca tion, in 1672, by Charles II of funds borrowed in like manner. Altho this sum, amounting to over £1,300, 000, had finally been paid, bankers and individuals of wealth were still very cautious about making advances to the government.
The original charter of the Bank of England pro vided that it should be given the power to issue notes, to deal in coin, bullion and commercial bills, and to make advances on goods and merchandise. These powers were contingent upon a loan to the govern ment of £1,200,000 for which the bank was paid eight per cent interest. From its ability to issue notes the bank found itself possessed of an equal amount of cur rency which it was at liberty to lend. These notes were not payable to bearer, hence they passed only by indorsement. They were post notes and bore interest. In 1697, the capital of the bank was increased, a fur ther loan was made to the government, and the bank was given the right to issue demand notes without in terest.
In 1709, an attempt was made to give to the Bank of England a monopoly of the banking business by providing that no corporation or partnership com posed of more than six persons should be given the power to issue circulating notes. The issue of notes at that time was supposed to cover the entire field of banking, so it was thought that this provision would prohibit any organization of more than six persons from engaging in banking in any form. It is obvious that this did not prohibit the issue of notes by indi viduals or corporations of less than six persons, nor did it prohibit the operation of banks of deposit by larger organizations. This fact was not understood for many years, however, and with the exception of small institutions, the Bank of England enjoyed a monopoly of the entire field of banking. The effect
of this monopoly was not felt at first, but with the general development of commerce which occurred in the latter part of the eighteenth century a demand for credit instruments arose which the Bank of Eng land could not meet. Accordingly, a great number of small, weak banks sprang up whose notes soon flooded the country. They were issued for the most part in small amounts, and, in 1777, a successful at tempt was made to drive them out of circulation by prohibiting the issue of notes in denominations smaller than £5.
2. Development of the use of A. Conant, in his "History of Modern Banks" of Issue," says: The prohibition upon note issues was probably one of the causes which contributed to the use checks. The notes issued by private bankers were at first written on paper for any odd sums like promissory notes. The practice was in troduced by Child and Company in 1729 of having the notes partly printed and partly written, like a modern check. These notes continued to be issued till about 1793, when the existing system of giving the depositor a credit for the full amount of his deposit and authorizing him to draw checks at his convenience against it was introduced. The issue of notes by private bankers was not forbidden until the Bank Act of 1844, but their use gradually diminished as the greater convenience of checks came to be understood.
3. The Bank and the government.—The intimate relation between the Bank of England and the gov ernment, which had been established at the outset, continued as time passed. The charter was renewed from time to time, usually on the condition of addi tional loans to the government. The war against Na poleon was financed largely by the Bank of England, Mr. Pitt drawing heavily upon the Bank for money which was sent to the Continent to finance the war. These drains of specie continued unabated until in 1797 the Bank was forced by Parliament to suspend specie payment. The suspension, or restriction, as it was called, continued until 1821.