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Bank of England

Where does the bank of England come from?

  • The bank of England is the second oldest central bank in the world, the oldest being the Sveriges Riksbank (Bank of Sweden), established in 1668.
  • Before the central bank was formed, the English Government had trouble borrowing money after the 1690 Battle of Beachy Head. They needed to rebuild their naval fleet. 
  • The Bank of England was formed in 1694 based on William Paterson's ideas as a private bank called "Governor and Company of the Bank of England" with long-term banking privileges including the issue of notes
  • The lenders would give the government cash (bullion) and also issue notes against the government bonds, which can be lent again. The £1.2m at 8% needed was raised in 12 days; half of this was used to rebuild the Navy.
  • The charter was renewed in 1742, 1764, and 1781.

Tour of the bank of England

On a tour of the bank of England, it was noted that each banknote takes an average 4p to print. The difference between the face value of the note goes to the treasury (Government). Each note printed devalues all other notes in circulation, the difference should go to the savers who's savings are declining in value. At the very least the government could issue all savers a notice how much to expect their savings purchasing power to go down by.

There is a perverse incentive for the Government to let the bank of England print money to raise revenue. If any citizen printed notes for an purpose they would be arrested for counterfeiting, but the Government may do so for any purpose no matter how ridiculous or wasteful.

Also the fact they are printing money is a form of theft, if someone bought oil off you that had been watered down, or sold you 3kg of goods that weighed less, it would be considered fraud or theft no matter the reason for it. But if the government does so for any reason dilute the money supply it can get away with it.

William Paterson 

Note in the history below, the bank of England and the Darien Scheme were advocated by the same person.
He remains famous for his idea of the Darien Scheme, the Scottish trading colony on the Isthmus of Panama, which unfortunately resulted in great disaster and near bankruptcy of the whole Scottish economy. 
HE is the founder of the Bank of England, an equally disastrous project that has stunted England for centuries.


Calls for a National Bank in England
In England the argument for some kind of bank to gather momentum after the Glorious Revolution of 1688 when William of Orange and Queen Mary jointly ascended the throne of England. The political economist Sir William Petty had recognised from the example of the Dutch that successful credit- based trading could benefit a nation in many ways and help to enlarge its sphere of influence: he wrote in 1682 "What remedy is there if we have too little money? We must erect a Bank, which well computed doth almost double the Effect of our coined Money; and we have in England Materials for a Bank which shall furnish Stock enough to drive the Trade of the whole Commercial World".

Dutch William had brought to his adopted country an understandable desire to help his native country in its war against the French and this proved to be the catalyst necessary for the idea of a national bank to be accepted, albeit grudgingly by some.

But it took a London-based Scots entrepreneur, William Paterson, to propose the scheme that eventually found favour: his first, proposed in 1691, had been rejected for several reasons. This was partly because, as he wrote in 1695, "Others said this project came from Holland and therefore would not hear of it, since we had too many Dutch things already". Under his scheme, in return for a loan of £1 million, the bills issued by his company should be made legal tender. This idea proved to be more than a century ahead of its time, and consequently unacceptable to the Parliamentary Committee.

'A Fund for Perpetual Interest': The funded National Debt is born
After several more rejections Paterson put forward a plan for a 'Bank of England' and a 'Fund for Perpetual Interest' although this time bills were not mentioned. Supported by two powerful personalities - Charles Montagu, Chancellor of the Exchequer, who looked after the Parliamentary lobbying, and Michael Godfrey a leading merchant who ensured the ideas acceptance in the City - it was all but inevitable, given the Government's pressing need for funds, that the scheme should be approved by Parliament. So Paterson's plan was accepted and the necessary Act passed. The public were invited to invest in the new project and it was these subscriptions totalling £1.2 million that were to form the initial capital stock of the Bank of England and were to be on-lent to Government in return for a Royal Charter.

The Government's immediate motive for creating the Bank was its pressing need for money - Paterson himself said that the Government accepted his proposal only as "a lame expedient for £1,200,000". And for some time afterwards the Government saw the Bank in that light - renewals of its Charter had to be paid for with loans, often painfully negotiated, from the Bank to the Exchequer. There was little in the Act creating the Bank to hint at what it would become - certainly no suggestion of a central bank, scarcely a hint of banking at all. But the Charter was enough. The Bank was big, it was incorporated with limited liability (extremely rare then) and it set out to take full advantage of this position.

To start with, the Bank was the Government's banker: managing the Government's accounts; managing (at some expenses to itself) the recoinage of 1696; providing and arranging loans to the Government. It was also a commercial bank, dealing in bills - the then equivalent of overdraft finance, furnishing finance for trade. It took deposits and issued notes, and with the development of the issue function it began to realise the dreams of some of the original projectors, of a Bank that would "double the Effect of out coined Money".