Historical Context and Debates

Banknotes and market prices of gold and silver

Prior to the suspension of payments, the British monetary and banking system was char­acterized by the functioning of the Bank of England as a central bank, that is, lender of last resort, under a standard gold-silver bimetallism regime.

The British banking system had at its centre the biggest issuing bank of the country and the only one in London with the right to have more than six partners: the Bank of England, founded in 1694. Its notes were the only paper money circulating in London. In this city there were also 60-70 bankers who played the role of intermediary between the “country” banks and the Bank of England. Outside London, the country banks (over 200 institutions) issued their own notes. The notes and deposits subject to check made up almost the entire supply of means of payment. There was no legal tender paper money. All banks were required to redeem their notes in coin, but the country banks used to pay them in Bank of England notes. The Bank of England, which centralized the reserves of the system, redeemed them in cash. These notes and the deposits in the Bank of England were used as reserve by the country banks.

Thanks to the Bank Restriction Act of February 1797, the Bank of England main­tained its capacity to provide banks with liquidity, but the functioning of the monetary system changed. The suspension of the bank’s obligation to pay its notes in coins left the market price of gold and silver dependent on variations in supply and demand. The same conclusion applied to foreign exchanges. However, the prophecy that the Bank of England notes would go the way of French assignats was not fulfilled. The prices of most commodities did not rise substantially and there was no sign of banknotes being distrusted during the first years of suspension. In 1799, food prices rose, but nobody mentioned a monetary cause. In 1800 the situation deteriorated: the market price of gold reached a level of 9 per cent above the mint price. In 1805, the price was 10 per cent above the mint price and in 1809 it was 15.5 per cent higher. Thereafter the situation worsened until 1814-15. See Figure 1.