During the earlier part of this period the Bank of England was able to keep its notes circulating at par with coin. The Act of 1797 had made them legal tender. Finally, however, depreciation began, and during the boom which followed the panic of 1810 it assumed considerable proportions. In that year, a committee was appointed by Parliament to investi gate the financial and monetary situation, and a report known as the Bullion Report was the result. In this report the real evils of the situation were ably ex pounded, and recommendations were made which might have restored the currency to a stable value if they had been adopted promptly. Altho the recom mendations were not adopted, they served to educate the minds of bankers and public men to an under standing of the problems involved, an education which bore fruit a few years later.
In 1816, England adopted the gold standard and in 1821, when the Bank had accumulated a large amount of gold, resumption became a fact. At the same time the government's power to borrow from the Bank was restricted so that no further loans could be made with out special authority from Parliament.
In 1823, it was discovered that the Bank of Eng land had not been given a monopoly of banking ex cept in its note issue function. Accordingly, a move ment followed to establish joint stock banks of de posit. This had little effect, as no banks were imme diately established, but it resulted in certain conces sions from the Bank of England, because of the fear of competition. In 1826 the Bank consented to the establishment of joint stock banks of issue at a dis tance of more than sixty-five miles from London. In 1833, joint stock banks were authorized in London and the vicinity, but they were not given the right of issue.
In 1833, an act was passed by Parliament which made the notes of the Bank of England legal tender as long as they were being redeemed in gold at the Bank.
4. Bank Act of the decade which followed the authorization of joint stock banks of issue, seventy-two of these banks were organized and note issues increased. In 1836 and again in 1839 panics occurred, and it was popularly thought that they were caused by an excessive issue of notes. As a result the famous debate over the currency princi ple as opposed to the banking principle of issue arose.
The advocates of the currency principle won out in Parliament and succeeded in getting their ideas in corporated in the Bank Act of 1844. The charter of the Bank of England was before Parliament for re newal. The new charter provided for the entire sep aration of the banking and issue departments. The banking department was ordered to deposit with the issue department £14,000,000 of government securi ties; this represented the average amount of circula tion then outstanding. This deposit included the government's debt to the bank, which amounted to £11,015,000. Up to the amount of the bonds de posited, the bank was permitted to issue uncovered notes, that is, notes not backed by a gold reserve of one hundred per cent. More notes could be issued
only when a deposit of an equal amount of gold coin or bullion was made with the issue department. The right of deposit was open to anyone. Joint stock banks of issue were allowed to continue issuing notes, but if they retired their circulation it could not be re issued. In order that this might not cause too sud den a contraction of the currency, the Bank of Eng land was given the right to increase its deposits of bonds and to issue uncovered notes against them to the amount of two-thirds of the circulation retired by the joint stock banks.
Under the operation of this plan the amount of notes issued against securities had increased to £18, 459,450 in 1914. In 1908, there were fourteen joint stock banks which retained the right of issue and had outstanding slightly over £900,000 of notes. At the same time, about of notes put out by private banks were in circulation.
5. Character of the Bank of England note.—By this Act the character of the bank note was changed entirely. Formerly it had been a credit instrument, depending for its redemption upon the Bank's reserve and general assets—the bonds, notes, etc., for which it had been exchanged. Its volume expanded and contracted with the demand for a medium of ex change. The Bank Act converted it into a gold cer tificate—a warehouse receipt for gold—destroying en tirely its character as a real bank note. Now its vol ume can expand only after a deposit of an equivalent amount of gold, hence the only economy the system attains is in the greater convenience of paper money. England's currency supply is extremely inelastic. It varies only with the supply of gold which is left in the country by the movement of foreign trade.
The Bank Act was followed by a considerable in crease in deposit banking. Accordingly this inelas ticity was not felt until the panic of 1847. In that year, and again in the panics of 1857 and 1866, the de mand on the Bank for notes was so great that the gov ernment suspended the Bank Act and allowed the bank to issue notes based on its general assets. The rate of interest at which the Bank could lend its notes was fixed in 1857 at eight per cent, and in 1866 at ten per cent. The interest was to be credited to the gov ernment's account, so that the Bank would not in crease its loans unnecessarily with the idea of making large profits for itself. In this suspension system lies the only elasticity of the English plan of note is sue. In the panics in which it has been used,. it has had the desired effect; but it is a dangerous device to rely upon because it depends upon the consent of Parliament or an order in council. There is always the danger that consent will not be granted in time. At best the Bank can only use its notes to check a panic already under way. It cannot well use them as a preventive.