The emergence of banks and paper money

Private banking flourished as early as the twelfth century and banking institutions appeared from the beginning of the seventeenth century onwards. The Bank of Amsterdam was established in 1609.

Although the establishment of the Bank of England seemed opportunistic, it emerged in an intellectual context that was favourable to banks. In England, at the beginning of the seventeenth century, there was a focus on providing credit to the poor, and the establishment of “banks of charity” in order to oust usurers. Dealing with credit risks, the mercantilists stressed the guarantees given by the borrowers - registration of prop­erty rights, solidarity mechanisms - insurance policies and bank shareholders’ funds (J.

After Louis XlV’s death, Law established in France a bank with very low sharehold­ers’ funds and which did not issue notes convertible into property assets but into specie. This bank was joined to a commercial company whose aim was to restructure the state debt (twice the level of national income). Law’s scheme was that the company would issue shares payable with state notes and banknotes. In fact, at the end of 1719, Law’s system turned into a speculative bubble where the bank granted loans and issued notes to speculators for buying the shares. At the peak of the speculation, the market value of the company was equal to six times the level of national income, and the outstand­ing amount of bank notes to three and half times.

Indeed, from the start, the Bank of England succeeded in creating liquidity: although only 60 per cent of the capital was called up, the bank issued banknotes to up to 100 per cent of the authorised capital for financing a loan to the treasury, at 8 per cent, meaning that it was 400 basis points below the goldsmiths’ interest rate. In 1697, it issued new shares payable with public debt, with a view to sustaining its price. To reduce the interest rate, it systemically and successfully intervened in the Exchequer bills market from 1707 on. For a century, until 1797, although its cash reserve fluctuated between 10 per cent and 40 per cent of the value of its outstanding issues, the bank succeeded in reimbursing its notes. England had invented the modern bank. Its note was not legal tender; it was a debt payable at sight issued against a credit debt payable at term. It created liquidity and helped to increase the liquidity of public debt and lower interest rates. The Bank of Scotland was established on the same model in 1695. Neither of the two banks had a monopoly on issuing notes, that is, creating liquidity. Private banks imitated them, and their banknotes circulated along with legal tender coins. The monetary debates during the eighteenth and nineteenth centuries inquired into the nature and effects of this paper money.