Bank Charter Act of 1844 (England)

The English Bank Charter Act of 1844 represents an important step in the evolution of the Bank of England as a central bank with a monopoly on the issuance of bank notes (paper money), one of the defining characteristics of a central bank. Today all modern economies have central banks with a monopoly on the issuance of bank notes, the Federal Reserve System in the United States being a good example. In the early 1800s a multitude of commercial banks issued their own bank notes in England, France, the United States, and other countries.

Sir Robert Peel, who was prime minister when Parliament passed the Bank Charter Act of 1844, shared with the famous economist David Ricardo the view that the issuance of currency should be a government monopoly with the profits accruing to the government. Peel considered establishing a new system of currency, with a board independent of government but responsible to Parliament, charged with the issue of paper, convertible into gold, and valid as legal tender. In reality Peel chose a more moderate course that made use of existing institutions:

Important provisions in the Bank Charter Act are paraphrased as follows:

1. The note issuing department of the Bank of England became separate and distinct from other departments. The bank removed it to a different building.
2. The Bank of England was required to hold gold bullion equal in value to the volume of its bank notes issued in excess of 14 million pounds. The government debt secured most of the first 14 million pounds.
3. The Bank of England was required to stand ready to redeem its bank notes into gold at the rate of 3 pounds 17 shillings and 9 pence per ounce of gold.
4. The creation of new banks with the privilege to issue bank notes was prohibited.
5. Banks currently issuing bank notes continued to issue notes as long as their total notes in circulation never exceeded their average for the 12 weeks preceding 27 April 1844.
6. If a bank became insolvent it lost the right to issue bank notes.
7. If a bank stopped issuing notes for any reason, it could never again put notes into circulation.
8. If two or more banks combined and ended up with more than six partners, the new bank could not issue bank notes.
9. The Bank of England was allowed to issue new bank notes backed by securities up to two-thirds of the value of discontinued country bank notes.

   The act had the desired effect. The issuance of bank notes gradually became the exclusive privilege of the Bank of England, which by World War I had made its monopoly complete. By monopolizing the issuance of paper money, the Bank of England was able to limit the money supply, helping to maintain its value, which is equivalent to avoiding inflation. The act helped bring stable prices, but its restrictions on the issuance of bank notes hampered the Banking of England’s ability to act as a lender of last resort.

   The government was forced to suspend the convertibility of Bank of England notes into gold during major financial crises. The financial crises of 1847, 1857, and 1866 all saw suspensions of convertibility.

   The Bank of France has enjoyed a monopoly on the issuance of bank notes since 1848, and the Federal Reserve System, established in 1914, has always had a monopoly on the issuance of bank notes. With the demise of the gold standard in the 1930s, the practice of maintaining the convertibility of bank notes into gold disappeared, giving central banks more freedom to inject liquidity into a financial system during a crisis.