Bank Charter Act of 1833 (England)

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With passage of the Bank Charter Act of 1833, Parliament renewed the Bank of England’s charter until 1855. The act also included provisions that strengthened the bank as the prime note-issuing institution in England, an important step toward giving a single institution a monopoly on the privilege of issuing bank notes.

In 1832 Parliament formed a committee of inquiry to look at various issues from all sides, including the Bank of England’s monopoly on joint-stock banking within 65 miles of London. The law forbade incorporated banks with more than six shareholders from engaging in London’s banking business. Other joint-stock banks wanted to enter the London market, and existing law seemed to suggest that other banks were free to set up business in London as long as they did not issue bank notes. The Bank of England hotly contested this viewpoint and Parliament made timely use of the expiration of the Bank of England’s charter to review the matter.

One outcome of the inquiry was a recommendation that did not make it into the law, but nevertheless represented an important principle. Horsely Palmer, governor of the bank, formulated the principle that all demand deposits and bank notes, that is “all liabilities to pay on demand,” should be backed by gold reserves equaling one-third of such liabilities. The remaining two-thirds could be invested in securities. The gold reserves were necessary to ensure the convertibility of bank notes and other bank liabilities. Parliament failed to act on Palmer’s recommendation, but the quantification of a reserve policy remained an important issue in banking.

One provision of the act stated “That any Body Politic although consisting of more than six persons may carry on the Trade of Business of Banking in London, or within sixty five miles thereof provided they did not issue notes.” The forbidden notes were notes payable on demand or within less than six months. Other banks could open for business in London but the Bank of England held a monopoly on the privilege of issuing bank notes.

The act also made Bank of England notes more than 5 pounds legal tender in England and Wales but not in Scotland and Ireland. These notes were legal tender everywhere except at the Bank of England. This provision enabled country banks to hold Bank of England notes as reserves in lieu of gold, reducing the drain on gold reserves in times of contraction, and centralizing gold reserves in the vault of the Bank of England.

Another important provision lifted the 5 percent usury ceiling on bills of exchange payable within three months. This provision was the beginning of the famed “bank rate” that became a powerful policy instrument for the Bank of England. If gold began to flow out, threatening England’s gold reserves, the bank raised the bank rate, attracting funds from abroad and ending the outflow.

With the Bank of England’s growing power came responsibility for public disclosure of activities. The act required the Bank of England to began sending weekly statistics on notes issues and bullion reserves to the Treasury and monthly summaries were to be published in the London Gazette.

The Act of 1833 was important in the history of money because it made Bank of England notes legal tender during peacetime, it effectively made the Bank of England the custodian of England’s gold reserves, and it gave the Bank of England the bank rate with which to control the inflow and outflow of gold. It laid in place principles fundamental to the operation of England’s nineteenth-century gold standard, a standard that ruled the monetary world by the end of the century.