France ended up conducting its own monetary experiment with paper money at around the same time as the American colonies in the early 1700s. Unlike the American experiment, it was not successful. It would be initiated by an immigrant Scotsman fleeing a murder charge (and gambling addict) by the name of John Law. (Jean Lass in French).
At this time—the early 1700’s—France was having much the same conversation around the money supply as in the Anglo-Saxon world. There, the problem was not so much a shortage of coins, but an excess of sovereign debt due to the wild spending sprees of France’s rulers on foreign wars and luxury lifestyles.
Despite being probably the most wealthy and powerful nation in Western Europe, France’s debts (really, the King’s debts) exceeded its assets by quite a bit, at least on paper. The country struggled to raise enough funds via its antiquated and inefficient feudal tax system to pay the interest on its bonds; France’s debt traded in secondary markets as what we might today call junk bonds (i.e. low odds of repayment).
Louis XIV, having lived too long, had died the year before Law’s arrival. The financial condition of the kingdom was appalling: expenditures were twice receipts, the treasury was chronically empty, the farmers-general of the taxes and their horde of subordinate maltôtiers were competent principally in the service of their own rapacity.
The Duc de Saint-Simon, though not always the most reliable counsel, had recently suggested that the straightforward solution was to declare national bankruptcy – repudiate all debt and start again. Philippe, Duc d’Orleans, the Regent for the seven-year-old Louis XV, was largely incapable of thought or action.
Then came Law. Some years earlier, it is said, he had met Philippe in a gambling den. The latter ‘had been impressed with the Scotsman’s financial genius.’ Under a royal edict of 2 May 1716, law, with his brother, was given the right to establish a bank with capital of 6 million livres, about 250,000 English pounds…
(Galbraith, pp. 21-22)
…The creation of the bank proceeded in clear imitation of the already successful Bank of England. Under special license from the French monarch, it was to be a private bank that would help raise and manage money for the public debt. In keeping with his theories on the benefits of paper money, Law immediately began issuing paper notes representing the supposedly guaranteed holdings of the bank in gold coins.
Law’s…bank that took in gold and silver from the public and lent it back out in the form of paper money. The bank also took deposits in the form of government debt, cleverly allowing people to claim the full value of debts that were trading at heavy discounts: if you had a piece of paper saying the king owed you a thousand livres, you could get only, say, four hundred livres in the open market for it, but Law’s bank would credit you with the full thousand livres in paper money. This meant that the bank’s paper assets far outstripped the actual gold it had in store, making it a precursor of the “fractional-reserve banking” that’s normal today. Law’s bank had, by one estimate, about four times as much paper money in circulation as its gold and silver reserves…
The new paper money had an attractive feature: it was guaranteed to trade for a specific weight of silver, and, unlike coins, could not be melted down or devalued. Before long, the banknotes were trading at more than their value in silver, and Law was made Controller General of Finances, in charge of the entire French economy.
The Invention of Money (The New Yorker)
It’s also worth noting that banknotes were denominated in the unit of account, unlike coins which typically were not. Coins’ value usually fluctuated against the unit of account (what prices were expressed in), sometimes by the day. What a silver sovereign or gold Louis d’Or was worth on one day might be different that the next, especially since the monarchs liked to devalue the currency in order to decrease the amount of their debts. However, if you brought, say, 10 livres, 18 sous worth of coins to Law’s bank, the paper banknote would be written up for the equivalent amount the coins were worth at that time: 10 livres, 18 sous.
By buying back the government’s debt, Law was able to “retire” it. Thus, the money circulating was ultimately backed by government debt (bonds), just like our money today. Law’s promise to redeem the notes for specie gave users the confidence to use them. Later on, the government will decree the notes of the Banque Generale as the “official” money to be used in payment of taxes and settlement of all debts, legitimizing their value by fiat. Law later attempted to sever the link to gold and silver by demonetizing the latter. He was not successful; paper money was far too novel at the time for people to trust its value in the absence of anything tangible backing it.
Not much of what transpired was that unusual for today, but it was pretty radical for the early 1700s. Had Law stopped at this point, it’s likely that all of this would have been successful, as Galbraith points out:
In these first months, there can be no doubt, John Law had done a useful thing. The financial position of the government was eased. The bank notes loaned to the government and paid out by it for its needs, as well as those loaned to private entrepreneurs, raised prices….[and] the rising prices…brought a substantial business revival.
Law opened branches of his bank in Lyons, La Rochelle, Tours, Amiens and Orleans; presently, in the approximate modern language, he went public. His bank became a publicly chartered company, the Banque Royale.
Had Law stopped at this point, he would be remembered for a modest contribution to the history of banking. The capital in hard cash subscribed by the stockholders would have sufficed to satisfy any holders of notes who sought to have them redeemed. Redemption being assured, not many would have sought it.
It is possible that no man, having made such a promising start, could have stopped…
(Galbraith, pp. 22-23)
Trading government debt for paper money helped lower the government’s debts, but on paper, France’s liabilities still exceeded its assets. But it had one asset that had not yet been monetized—millions of acres of land on the North American continent. So Law set out to monetize that land by turning it into shares in a joint-stock company called the Mississippi Company (Compagnie d’Occident). The Mississippi Company had a monopoly on all trading with the Americas. Buying a share in the company meant a cut of the profits (i.e. equity) of trading with North America.
The first loans and the resulting note issue having been visibly beneficial – and also a source of much personal relief – the Regent proposed and additional issue. If something does good, more must do better. Law acquiesced.
Sensing the need, he also devised a way of replenishing the reserves with which the Banque Royale backed up its growing volume of notes. Here he showed that he had not forgotten his original idea of a land bank.
His idea was to create the Mississippi Company to exploit and bring to France the very large gold deposits which Louisiana was thought to have as subsoil. To the metal so obtained were also to be added the gains of trade. Early in 1719, the Mississippi Company (Compagnie d’Occident), later the Company of the Indies, was gives exclusive trading privileges in India, China and the South Seas. Soon thereafter, as further sources of revenue, it received the tobacco monopoly, the right to coin money and the tax farm. (Galbraith, p. 23)
Law—or the Duc d’Arkansas as he was now known—talked up the corporation so well that the value of the shares skyrocketed—probably the world’s very first stock bubble (but hardly the last). Gambling fever was widespread and contagious, as the desire to get rich by doing nothing is a human universal. The term “millionaire” was coined. Law took advantage of the inflated share price to buy back more of the government’s debt. And the money to buy the shares at the inflated prices was printed by the bank itself. Knowing that there was far more paper than gold and silver to back it in the kingdom, Law then tried to break the link between paper money and specie by demonetizing gold and silver; at one point making it illegal to even hold precious metals.
He was unsuccessful. Paper money was still too new, and people were unwilling to trust it without the backing of previous metal, causing a loss of faith in the currency. Later suspensions of convertibility were done after generations of paper money use. Law’s entire scheme (from origin to collapse) took place over the course of less than a year.
[Law] funded the [Mississippi] company the same way he had funded the bank, with deposits from the public swapped for shares. He then used the value of those shares, which rocketed from five hundred livres to ten thousand livres, to buy up the debts of the French King. The French economy, based on all those rents and annuities and wages, was swept away and replaced by what Law called his “new System of Finance.”
The use of gold and silver was banned. Paper money was now “fiat” currency, underpinned by the authority of the bank and nothing else. At its peak, the company was priced at twice the entire productive capacity of France…that is the highest valuation any company has ever achieved anywhere in the world.
Galbraith and Weatherford summarize the shell game that Law’s “system” ended up becoming:
To simplify slightly, Law was lending notes of the Banque Royale to the government (or to private borrowers) which then passed them on to people in payment of government debts or expenses. These notes were then used by the recipients to buy stock in the Mississippi Company, the proceeds from which went to the government to to pay expenses and pay off creditors who then used the notes to buy more stock, the proceeds from which were used to meet more government expenditures and pay off more public creditors. And so it continued, each cycle being larger than the one before. (Galbraith, p. 24)
The Banque Royale printed paper money, which investors could borrow in order to buy stock in the Mississippi company; the company then used the new notes to pay out its bogus profits. Together the Mississippi Company and the Banque Royale were producing paper profits on each other’s accounts. They bank had soon issued twice as much paper money as there was specie in the whole country; obviously it could no longer guarantee that each paper note would be redeemed in gold. (Weatherford, p. 131)
Such a scheme couldn’t last, of course. Essentially the entire French economy—its central bank, its money supply, its tax system, and the monopoly on land in North America—were in the hands of one single, giant conglomerate run by one man. That meant that when one part of the system failed, all the rest went down like ascending mountain climbers roped together.
Because the central bank owned the Mississippi company, it had an incentive to loan out excess money to drive the share price up—in other words, to inflate a stock bubble based on credit. This is always a bad idea. Finally, Law’s exaggeration of the returns on investments in the Mississippi Company inflated expectations far beyond what was realistic.
The popping of the Mississippi stock bubble, followed by a run on the bank, was enough to bring the whole thing crashing down.
People started to wonder whether these suddenly lucrative investments were worth what they were supposed to be worth; then they started to worry, then to panic, then to demand their money back, then to riot when they couldn’t get it.
Gold and silver were reinstated as money, the company was dissolved, and Law was fired, after a hundred and forty-five days in office. In 1720, he fled the country, ruined. He moved from Brussels to Copenhagen to Venice to London and back to Venice, where he died, broke, in 1729.
The Invention of Money (The New Yorker)
As Law must have known, if you gamble big, sometimes you lose big.
Some of the death of the Bank was murder, not suicide. As part of his System, one of Law’s initiatives was to simplify and modernize the inefficient and antiquated French tax system. Taxes were collected by tax farmers (much as in ancient Rome), and Law threatened to overturn their apple cart. He also attempted to end the sale of government offices to the highest bidder. This made him a lot of enemies among the moneyed classes, who thrived on graft and corruption. Such influential people (notably the financiers the Paris brothers), were instrumental in the run on the bank and the subsequent loss of confidence in the money system:
[Law] set about streamlining a tax system riddled with corruption and unnecessary complexity. As one English visitor to France in the late seventeenth century observed. “The people being generally so oppressed with taxes, which increase every day, their estates are worth very little more than what they pay to the King; so that they are, as it were, tenants to the Crown, and at such a rack rent that they find great difficulty to get their own bread.” The mass of offices sold to raise money had caused one of Louis XIV’s ministers to comment, “When it pleases Your Majesty to create an office, God creates a fool to purchase it.” There were officials for inspecting the measuring of cloth and candles; hay trussers; examiners of meat, fish and fowl. There was even an inspector of pigs’ tongues.
This did nothing for efficiency, Law deemed, and served only to make necessities more expensive and to encourage the holders of the offices “to live in idleness and deprive the state of the service they might have done it in some useful profession, had they been obliged to work.” In place of the hundreds of old levies he swept away (over forty in one edict alone), Law introduced a new national taxation system called the denier royal, based on income. The move caused an outcry among the holders of offices, many of whom were wealthy financiers and members of the Parliament, but delight among the public. “The people went dancing and jumping about the streets,” wrote Defoe. “They now pay not one farthing tax for wood, coal, hay, oats, oil, wine, beer, bread, cards, soap, cattle, fish.” (Janet Gleeson, Millionaire; pp. 155-156
Michel Aglietta, in his magisterial work on money, notes that Law…
…wanted to introduce the logic of capitalism in France, based on providing credit through money creation. Money creation had to be based on expected future wealth, and no longer on the past wealth accumulated in precious metals. (Aglietta, p. 206, emphasis in original)
The danger is, if this wealth fails to materialize; or if people lose the belief that it will materialize, confidence in the system is lost, and failure soon follows.
Although John Law has come down in history as a grifter, and his ideas as fundamentally unsound, many of his ideas eventually became fundamental tenets of modern global finance:
The great irony of Law’s life is that his ideas were, from the modern perspective, largely correct. The ships that went abroad on behalf of his great company began to turn a profit. The auditor who went through the company’s books concluded that it was entirely solvent—which isn’t surprising, when you consider that the lands it owned in America now produce trillions of dollars in economic value.
Today, we live in a version of John Law’s system. Every state in the developed world has a central bank that issues paper money, manipulates the supply of credit in the interest of commerce, uses fractional-reserve banking, and features joint-stock companies that pay dividends. All of these were brought to France, pretty much simultaneously, by John Law.
The Invention of Money (The New Yorker)
Law’s efforts left a lingering suspicion of paper money in France. Unfortunately, the revenues problem was not definitively solved. Going back on a specie standard delivered a huge blow to commerce. While England’s paper money system flourished, France stagnated economically. Eventually, the revenues situation of the government became so dire that the King had no choice but to call an Estates General—the extremely rare parliamentary session that kicked off the French Revolution—in 1789.
Once the Mississippi bubble burst, a lot of the capital in France needed some new outlet to invest in. Much of that capital fled across the channel to England, which at the time was inflating a stock bubble of its own:
France’s ruin was England’s gain. Numerous bruised Mississippi shareholders chose to reinvest in English South Sea shares.
The previous month, with a weather eye to developments in France, the South Sea Company managed to beat its rival the Bank of England and secure a second lucrative deal with the government whereby it took over a further $48 million of national debt and launched a new issue of shares. A multitude of English and foreign investors were now descending on London as they had flocked less than a year earlier to Paris “with as much as they can carry and subscribing for or buying shares.”
In Exchange Alley–London’s rue Quincampoix–the sudden surce of new money also bubbled a plethora of alternative companies launched to capitalize on the new fashion for financial fluttering… (Gleeson, p, 200)
Britain chose a different tack – sovereign debt would be monetized and circulate as money. It too utilized the joint-stock company model that had been invented in the previous centuries to enable the Europeans to raise the funds to exploit and colonize the rest of the world. A bank was founded as a chartered company to take in money through subscribed shares and loan out that money to the King. That debt—and not land—would securitize the notes issued by the bank. The notes would then circulate as money, albeit alongside precious metal coins and several other forms of payment. As with the original invention of sovereign debt in northern Italy, it was used to raise the necessary funds for war:
The modern system for dealing with [the] problem [of funding wars] arose in England during the reign of King William, the Protestant Dutch royal who had been imported to the throne of England in 1689, to replace the unacceptably Catholic King James II.
William was a competent ruler, but he had serious baggage—a long-running dispute with King Louis XIV of France. Before long, England and France were involved in a new phase of this dispute, which now seems part of a centuries-long conflict between the two countries, but at the time was variously called the Nine-Years’ War or King William’s War. This war presented the usual problem: how could the nations afford it?
King William’s administration came up with a novel answer: borrow a huge sum of money, and use taxes to pay back the interest over time. In 1694, the English government borrowed 1.2 million pounds at a rate of eight per cent, paid for by taxes on ships’ cargoes, beer, and spirits. In return, the lenders were allowed to incorporate themselves as a new company, the Bank of England. The bank had the right to take in deposits of gold from the public and—a second big innovation—to print “Bank notes” as receipts for the deposits. These new deposits were then lent to the King. The banknotes, being guaranteed by the deposits, were as good as gold money, and rapidly became a generally accepted new currency.
The Invention of Money (The New Yorker)
From this point forward, money would be circulating government debt. Plus, it’s value would be based on future revenues, as Aglietta noted above, and not just on the amount of gold and silver coins floating around.
The originality of the Bank of England was that it was not a deposit bank. Unlike for the Bank of Amsterdam, the coverage for the notes issued was very low (3 percent in the beginning). These notes, the counterparty to its loans to the state, replaced bills of exchange and became national and international means of payment for the bank’s customers.
They were not legal tender until 1833. But the securities issued by the bank, bringing interest on the public debt, became legal tender for all payments to the government from 1697 onwards. (Aglietta, pp. 136-137)
Why did the King of England have to borrow at all? Well, for a couple reasons. The power to raise taxes had been taken away from the King and given to Parliament as a consequence of the English Revolution. That revolutionary era also witnessed the inauguration goldsmith banking (such as that undertaken by John Law’s own family of goldsmiths). These goldsmith receipts were the forerunners of the banknote:
The English Civil War…broke out because parliament disputed the king’s right to levy taxes without its consent. The use of goldsmith’s safes as secure places for people’s jewels, bullion and coins increased after the seizure of the mint by Charles I in 1640 and increased again with the outbreak of the Civil War. Consequently some goldsmiths became bankers and development of this aspect of their business continued after the Civil War was over.
Within a few years of the victory by the parliamentary forces, written instructions to goldsmiths to pay money to another customer had developed into the cheque (or check in American spelling). Goldsmiths’ receipts were used not only for withdrawing deposits but also as evidence of ability to pay and by about 1660 these had developed into the banknote.
Warfare and Financial History (Glyn Davies, History of Money online)
By this time, control over money had passed into the hands of a rising mercantile class, who—thanks to the staggering wealth produced by globalized trade—possessed more wealth than mere princes and kings, but lacked the ability to write laws or to print money, which they strongly coveted. It was these merchants and “moneyed men” (often members of the Whig party in Parliament) who backed the Dutch staadtholder William of Orange’s claim to the English throne in 1688.
The banknotes began to circulate widely, displacing coins and bills of exchange. And it didn’t stop there: more money was quickly needed, and the Bank acquired more influence. Part of this was due to England being a naval—rather than an army—power. Warships require huge expenditures of capital to build. They also require a vast panoply of resources, such as wood, nails, iron, cloth, stocked provisions, and so forth; whereas land-based armies just require paying soldiers and provisions (which can be commandeered). Thus, financial means to mobilize these resources were much more likely in naval powers such as Holland and England than in continental powers like France, Austria and Spain.
This important post from the WEA Pedagogy blog uses excerpts from Ellen Brown’s Web of Debt to lay out the creation of the Bank of England, and, consequently, central banking in general (and is well-worth reading in full):
William was soon at war with Louis XIV of France. To finance his war, he borrowed 1.2 million pounds in gold from a group of moneylenders, whose names were to be kept secret. The money was raised by a novel device that is still used by governments today: the lenders would issue a permanent loan on which interest would be paid but the principal portion of the loan would not be repaid.
The loan also came with other strings attached. They included:
– The lenders were to be granted a charter to establish a Bank of England, which would issue banknotes that would circulate as the national paper currency.
– The Bank would create banknotes out of nothing, with only a fraction of them backed by coin. Banknotes created and lent to the government would be backed mainly by government I.O.U.s, which would serve as the “reserves” for creating additional loans to private parties.
– Interest of 8 percent would be paid by the government on its loans, marking the birth of the national debt.
– The lenders would be allowed to secure payment on the national debt by direct taxation of the people. Taxes were immediately imposed on a whole range of goods to pay the interest owed to the Bank.
The Bank of England has been called “the Mother of Central Banks.” It was chartered in 1694 to William Paterson, a Scotsman who had previously lived in Amsterdam. A circular distributed to attract subscribers to the Bank’s initial stock offering said, “The Bank hath benefit of interest on all moneys which it, the Bank, creates out of nothing.” The negotiation of additional loans caused England’s national debt to go from 1.2 million pounds in 1694 to 16 million pounds in 1698. By 1815, the debt was up to 885 million pounds, largely due to the compounding of interest. The lenders not only reaped huge profits, but the indebtedness gave them substantial political leverage.
The Bank’s charter gave the force of law to the “fractional reserve” banking scheme that put control of the country’s money in a privately owned company. The Bank of England had the legal right to create paper money out of nothing and lend it to the government at interest. It did this by trading its own paper notes for paper bonds representing the government’s promise to pay principal and interest back to the Bank — the same device used by the U.S. Federal Reserve and other central banks today.
Note that the interest on the loan is paid, but never the loan itself. That meant that tax revenues were increasingly funneled to a small creditor class to whom the government was indebted. Today, we call such people bond holders, and they exercise their leverage over governments through the bond markets. For all intents and purposes, this system ended government sovereignty and tied the hands of even elected governments being able to spend tax money on the domestic needs of their own people. Control over the state’s money was lost forever.
An interesting couple of notes: William Paterson was, like John Law, a Scotsman—giving credence to the claim that it was the Scots who “invented Capitalism” (Adam Smith and James Watt were also Scots). It also raises the idea (to me, anyway) that the modern financial system was started by instinctive hustlers and gamblers. We’ve already referred to John Law’s expertise at the gambling tables of Europe and ability to inspire confidence in his schemes. Patterson, upon returning to Scotland, began raising funds via stock for an ambitious scheme to develop a society in Central America. This scheme ended up being on of the worst disasters in history. Not only that, but the Darien scheme collapsed so badly that Scotland’s entire financial health was devastated, and is considered to be a factor in Scotland signing the Acts of Union, politically joining with England to the south.
For an overview of the Darien scheme, see this: Scotland’s lessons from Darien debacle (BBC)
The WEA Pedagogy blog than adds some additional details:
Some more detail of interest is that the creation of Bank of England was tremendously beneficial for England. The King, no longer constrained, was able to build up his navy to counter the French. The massive (deficit) spending required for this purpose led to substantial progress in industrialization.
Quoting Wikipedia on this: “As a side effect, the huge industrial effort needed, including establishing ironworks to make more nails and advances in agriculture feeding the quadrupled strength of the navy, started to transform the economy. This helped the new Kingdom of Great Britain – England and Scotland were formally united in 1707 – to become powerful. The power of the navy made Britain the dominant world power in the late 18th and early 19th centuries”
The post then summarizes the history of the creation of central banking:
…It is in this spirit that we offer a “finance drives history” view of the creation of the first Central Bank. The history above can be encapsulated as follows:
1. Queen Elizabeth asserted and acquired the sovereign right to issue money.
2. The moneylenders (the mysterious 0.1% of that time) financed and funded a revolution against the king, acquiring many privileges in the process.
3. Then they financed and funded the restoration of the aristocracy, acquiring even more privileges in the process.
4. Finally, when the King was in desperate straits to raise money, they offered to lend him money at 8% interest, in return for creating the Bank of England, acquiring permanently the privilege of printing money on behalf of the king.
The process by which money was created by the Bank of England is extremely interesting. They acquired the debt of the King. This debt was used as collateral/backing for the money they created. The notes they issued were legal tender in England. Whenever necessary, they were prepared to exchange them for gold, at the prescribed rates. However, when the confidence of the public is high, the need for actual gold as backing is substantially reduced.
Origins of Central Banking (WEA Pedagogy Blog)
As I noted above, the importance of the Navy in the subsequent industrialization of England is often overlooked. There have been a few scholars who have argued that it was Britain’s emphasis on naval power which was a factor in England (and not somewhere else) becoming the epicenter of the Industrial Revolution. Many of its key inventions were sponsored by the government in order to more effectively fight and navigate at sea (from accurate clocks and charts to canned food). Even early mass production was prompted by the needs of the British Navy: pulley blocks were mass-produced by engineers and were one of the first items made this way via mechanization.
Just like in other countries, the needs of war caused the Bank to issue more and more notes, greatly increasing to the national debt. However, the vast profits of industrialization and colonialism were enough to support it. When convertibility was finally temporarily suspended in the mid 1800s by necessity, paper money continued to carry the trust of the public, unlike in France. Galbraith sums up the subsequent history of the Bank of England:
In the fifteen years following the granting of the original charter the government continued in need, and more capital was subscribed by the Bank. In return, it was accorded a monopoly of joint-stock, i.e., corporate, banking under the Crown, one that lasted for nearly a century. In the beginning, the Bank saw itself merely as another, though privileged, banker.
Similarly engaged in a less privileged way were the goldsmiths, who by then had emerged as receivers of deposits and sources of loans and whose operations depended rather more on the strength of their strong boxes than on the rectitude of their transactions. They strongly opposed the renewal of the Bank’s charter. Their objections were overcome, and the charter was renewed.
Soon, however, a new rival appeared to challenge the Bank’s position as banker for the government. This was the South Sea Company. In 1720, after some years of more routine existence, it came forward with a proposal for taking over the government debt in return for various concessions, including, it was hoped, trading privileges to the Spanish colonies, which, though it was little noticed at the time, required a highly improbable treaty with Spain.
The Bank of England bid strenuously against the South Sea Company for the public debt but was completely outdone by the latter’s generosity, as well as by the facilitating bribery by the South Sea Company of Members of Parliament and the government. The rivalry between the two companies did not keep the Bank from being a generous source of loans for the South Sea venture. All in all, it was a narrow escape.
For the enthusiasm following the success of the South Sea Company was extreme. In the same year that Law’s operations were coming to their climax across the Channel, a wild speculation developed in South Sea stock, along with that in numerous other company promotions, including one for a wheel for perpetual motion, one for ‘repairing and rebuilding parsonage and vicarage houses’ and the immortal company ‘for carrying on an undertaking of great advantage, but nobody to know what it is’. All eventually passed into nothing or something very near.
In consequence of its largely accidental escape, the reputation of the Bank for prudence was greatly enhanced.
As Frenchmen were left suspicious of banks, Englishmen were left suspicious of joint-stock companies. The Bubble Acts (named for the South Sea bubble) were enacted and for a century or more kept such enterprises under the closest interdict.
From 1720 to 1780, the Bank of England gradually emerged as the guardian of the money supply as well as of the financial concerns of the government of England. Bank of England notes were readily and promptly redeemed in hard coin and, in consequence, were not presented for redemption. The notes of its smaller competitors inspired no such confidence and were regularly cashed in or, on occasion, orphaned.
By around 1770, the Bank of England had become nearly the sole source of paper money in London, although the note issues of country banks lasted well into the following century. The private banks became. instead, places of deposit. When they made loans, it was deposits, not note circulation, that expanded, and, as a convenient detail, cheques now came into use. (Galbraith, 32-34)
By a complete accident, Britain was able to escape France’s fate. When the South Sea bubble popped, the Bank of England was able to reliably take up the slack and manage the government’s debt—an option that France did not have, since the central bank and the Company were all part of the same organization, and that organization had a monopoly over loans to the government, tax collection, and money creation.
Next time: An Instrument of Revolution.