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Young Fashion - Hell and Furies, is this to be borne? Lory-Faith, sir, I cou'd almost have given him a knock o' th' pate myself.

ORIGIN AND DEVELOPMENT OF THE BANK OF

ENGLAND.

BY WALTER BAGEHOT.

(From "Lombard Street.")

[WALTER BAGEHOT, English writer, was born in Somersetshire, February 3, 1826. He was graduated at London University; was in France at the time of Louis Napoleon's coup d'état of December 2, 1851, and wrote letters to the London Inquirer on it which are classic; took part in his father's banking and shipping business; in 1860 succeeded his father-in-law as editor of the Economist, which he raised from a purely business organ to a great political review. He wrote "Physics and Politics" (1863), edited the National Review 1864-1868, and wrote many literary and biographical essays for it; published "The English Constitution" (1867), "Lombard Street" (1873), and articles collected after his death as "Economic Studies." He died March 24, 1877.]

OF all institutions in the world, the Bank of England is now probably the most remote from party politics and from "financing"; but in its origin it was not only a finance company, but a Whig finance company, it was founded by a Whig government because it was in desperate want of money, and supported by the "City" because the "City" was Whig. Very briefly, the story was this:

The government of Charles II. (under the Cabal ministry) had brought the credit of the English state to the lowest possible point: it had perpetrated one of those monstrous frauds which are likewise gross blunders. The goldsmiths, who then carried on upon a trifling scale what we should now call "banking," used to deposit their reserve of treasure in the Exchequer, with the sanction and under the care of the government. In many European countries, the credit of the state had been so much better than any other credit that it had been used to strengthen the beginnings of banking. The credit of the state had been so used in England: though there had lately been a civil war and several revolutions, the honesty of the English government was trusted implicitly. But Charles II. showed that it was trusted undeservedly: he shut up the Exchequer, would pay no one, and so the goldsmiths were ruined.

The credit of the Stuart government never recovered from this monstrous robbery, and the government created by the revolution of 1688 could hardly expect to be more trusted with money than its predecessor. A government created by a revolution hardly ever is: there is a taint of violence which capitalists dread instinctively, and there is always a rational apprehension that the government which one revolution thought fit to set up, another revolution may think fit to pull down. In 1694 the credit of William III.'s government was so low in London that it was impossible for it to borrow any large sum; and the evil was the greater, because in consequence of the French war the financial straits of the government were extreme. At last a scheme was hit upon which would relieve their necessities. "The plan," says Macaulay, "was that twelve hundred thousand pounds should be borrowed by the government, on what was then considered as the moderate interest of 8 per cent. In order to induce capitalists to advance the money promptly on terms so favorable to the public, the subscribers were to be incorporated by the name of 'The Governor and Company of the Bank of England';" they were so incorporated, and the £1,200,000 was obtained.

On many succeeding occasions, their credit was of essential use to the government. Without their aid, our National Debt could not have been borrowed; and if we had not been able to raise that money we should have been conquered by France and compelled to take back James II. And for many years afterwards, the existence of that debt was a main reason why the industrial classes never would think of recalling the Pretender or of upsetting the Revolution settlement: the "fundholder" is always considered in the books of that time as opposed to his "legitimate" sovereign, because it was to be feared that this sovereign would repudiate the debt which was raised by those who dethroned him, and which was spent in resisting him and his allies. For a long time the Bank of England was the focus of London Liberalism, and in that capacity rendered to the state inestimable services; in return for these substantial benefits, the Bank of England received from the government, either at first or afterwards, three most important privileges:

First. The Bank of England had the exclusive possession of the government balances. In its first period, as I have shown, the Bank gave credit to the government; but after

wards it derived credit from the government. There is a natural tendency in men to follow the example of the government under which they live: the government is the largest, most important, and most conspicuous entity with which the mass of any people are acquainted; its range of knowledge must always be infinitely greater than the average of their knowledge, and therefore, unless there is a conspicuous warning to the contrary, most men are inclined to think their government right, and when they can, to do what it does. Especially in money matters, a man might fairly reason, "If the government is right in trusting the Bank of England with the great balance of the nation, I cannot be wrong in trusting it with my little balance."

Second. The Bank of England had till lately the monopoly of limited liability in England. It was an exception of the greatest value to the Bank of England, because it induced many quiet merchants to be directors of the Bank, who certainly would not have joined any bank where all their fortunes were liable, and where the liability was not limited.

Third. The Bank of England had the privilege of being the sole joint-stock company permitted to issue bank notes in England. Private London bankers did indeed issue notes down to the middle of the last century, but no joint-stock company could do so. Its effect was very important: it in time gave the Bank of England the monopoly of the note issue of the metropolis. No company but the Bank of England could issue notes, and unincorporated individuals gradually gave way and ceased to do so.

With so many advantages over all competitors, it is quite natural that the Bank of England should have far outstripped them all. Inevitably it became the bank in London; all the other bankers grouped themselves round it and lodged their reserve with it. Thus our one-reserve system of banking was not deliberately founded upon definite reasons: it was the gradual consequence of many singular events, and of an accumulation of legal privileges on a single bank which has now been altered, and which no one would now defend.

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