Bank Charter Act 1844
Encyclopedia
The Bank Charter Act 1844 (7 & 8 Vict. c. 32) was an Act
of the Parliament of the United Kingdom
, passed under the government of Robert Peel
, which restricted the powers of British banks and gave exclusive note-issuing powers to the central Bank of England
.
Under the Act, no bank other than the Bank of England could issue new banknote
s, and issuing banks would have to withdraw their existing notes in the event of their being the subject of a takeover. At the same time, the Bank of England was restricted to issue new banknotes only if they were 100% backed by gold or up to £14 million in government debt. The Act served to restrict the supply of new notes reaching circulation, and gave the Bank of England an effective monopoly on the printing of new notes. The Act exempted demand deposits from the legal requirement of a 100-percent reserve which it did demand with respect to the issuance of paper money.
The Act was a victory for the British currency school, who argued that the issue of new banknotes was a major cause of price inflation.
Although the Act required new notes to be backed fully by gold or government debt
, the government retained the power to suspend the Act in case of financial crisis, and this in fact happened several times, in the years 1847, 1857, and in 1866, during the Overend Gurney crisis.
Also, while the act restricted the supply of new notes, it did not restrict the creation of new bank deposits
, and these would continue to increase in size over the course of the 19th century.
As a result of the Act, as provincial banking companies merged to form larger banks, they lost their right to issue notes. The English private banknote eventually disappeared, leaving the Bank of England with a monopoly of note issue in England and Wales. The last private bank to issue its own banknotes in England and Wales was Fox, Fowler and Company
in 1921.
The limitations of the 1844 Act only affected banks in England and Wales, and today three commercial banks in Scotland and four in Northern Ireland continue to issue their own sterling banknotes, regulated by the Bank of England.
abolished the "weekly return" of the number of banknotes issued by the Bank of England: "Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect".
Act of Parliament
An Act of Parliament is a statute enacted as primary legislation by a national or sub-national parliament. In the Republic of Ireland the term Act of the Oireachtas is used, and in the United States the term Act of Congress is used.In Commonwealth countries, the term is used both in a narrow...
of the Parliament of the United Kingdom
Parliament of the United Kingdom
The Parliament of the United Kingdom of Great Britain and Northern Ireland is the supreme legislative body in the United Kingdom, British Crown dependencies and British overseas territories, located in London...
, passed under the government of Robert Peel
Robert Peel
Sir Robert Peel, 2nd Baronet was a British Conservative statesman who served as Prime Minister of the United Kingdom from 10 December 1834 to 8 April 1835, and again from 30 August 1841 to 29 June 1846...
, which restricted the powers of British banks and gave exclusive note-issuing powers to the central Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
.
Purpose
Until the mid-nineteenth century, commercial banks in Britain and Ireland were able to issue their own banknotes, and notes issued by provincial banking companies were commonly in circulation.Under the Act, no bank other than the Bank of England could issue new banknote
Banknote
A banknote is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. In addition to coins, banknotes make up the cash or bearer forms of all modern fiat money...
s, and issuing banks would have to withdraw their existing notes in the event of their being the subject of a takeover. At the same time, the Bank of England was restricted to issue new banknotes only if they were 100% backed by gold or up to £14 million in government debt. The Act served to restrict the supply of new notes reaching circulation, and gave the Bank of England an effective monopoly on the printing of new notes. The Act exempted demand deposits from the legal requirement of a 100-percent reserve which it did demand with respect to the issuance of paper money.
The Act was a victory for the British currency school, who argued that the issue of new banknotes was a major cause of price inflation.
Although the Act required new notes to be backed fully by gold or government debt
Government debt
Government debt is money owed by a central government. In the US, "government debt" may also refer to the debt of a municipal or local government...
, the government retained the power to suspend the Act in case of financial crisis, and this in fact happened several times, in the years 1847, 1857, and in 1866, during the Overend Gurney crisis.
Also, while the act restricted the supply of new notes, it did not restrict the creation of new bank deposits
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
, and these would continue to increase in size over the course of the 19th century.
As a result of the Act, as provincial banking companies merged to form larger banks, they lost their right to issue notes. The English private banknote eventually disappeared, leaving the Bank of England with a monopoly of note issue in England and Wales. The last private bank to issue its own banknotes in England and Wales was Fox, Fowler and Company
Fox, Fowler and Company
Fox, Fowler, and Company was a British private bank, based in Wellington, Somerset. The company was founded in 1787 as a supplementary business to the main activities of the Fox family, sheep-herding and wool-making.-Banknote issue:...
in 1921.
The limitations of the 1844 Act only affected banks in England and Wales, and today three commercial banks in Scotland and four in Northern Ireland continue to issue their own sterling banknotes, regulated by the Bank of England.
Banking Act 2009
The second Banking Act 2009Banking Act 2009
The Banking Act 2009 is an Act of the Parliament of the United Kingdom that entered into force in part on the 21 February 2009 in order, amongst other things, to replace the Banking Act 2008...
abolished the "weekly return" of the number of banknotes issued by the Bank of England: "Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect".
See also
- Henry MeulenHenry MeulenHenry Meulen was a British individualist anarchist and economist. He was an editor of the periodical called The Individualist, published by the Personal Rights Association and actively promoted the philosophy of free banking...
- a critic who saw the Bank Charter Act as a cause of economic depression and political revolution - Banknotes of the pound sterling - a list of note-issuing banks in the Sterling areaSterling AreaThe sterling area came into existence at the outbreak of World War II. It was a wartime emergency measure which involved cooperation in exchange control matters between a group of countries, which at the time were mostly dominions and colonies of the British Empire...
- fractional reserve banking
- Central BankCentral bankA central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
External links
- How Money is Created by Banks - 5-minute video explaining how money is created today
UK Legislation
- Bank Charter Act 1844 - full text