The Bank of England, to which the note issue privilege surrendered by other banks accrued under the Bank Act of 1844, the "Peel Act," has a practical monopoly of the bank note issue in England. The English bank note system is based on the currency principle. To the amount of £18.45 million the issue is secured by government and other securities, this portion of the issue being called the "uncovered" issue. All in excess of that amount is secured pound for pound with gold.
The Bank Of England Is Divided Into Two Distinct Parts - The Issue Department and the Banking Department. The Issue Department is charged with the sole and exclusive function of the issue and redemption of bank notes; the Banking Department handles discounts, loans, and deposits. The Banking Department procures notes from the Issue Department in the same way as does any holder of coin or bullion, that is, by the exchange of gold for notes. In making loans the Banking Department generally credits the borrower with deposits, but it may pay out notes or gold; the same is true of any payment by the Banking Department. A large part of the outstanding bank notes are found in the vaults of the Banking Department and constitute a portion of its reserves; they simply represent so much gold kept in the Issue Department.
Bank notes of the Bank of England may be used as reserve by the other banks whose reserves consist of "Cash and Due from the Bank of England." The "Cash" includes many notes of the Bank of England, and the portion described as "Due from the Bank of England" consists largely of balances carried with the Bank of England by the local bank.
The uncovered issue of the Bank of England is fixed in amount, but the covered issue, which consists really of certificates of deposit, can expand indefinitely. With every increase of the covered issue, the per cent reserve against the total issue is increased. As a result the bank notes are absolutely safe but wholly inelastic; to increase the total volume of the country's currency by the method of note issue is impossible, since gold is simply exchanged for an equal amount of bank notes. In financial crises the system breaks down; five times it has been found necessary to disregard the legal limitations on the uncovered issue. On such occasions Parliament suspends the Law of 1844 and so enables the Banking Department to carry to the Issue Department more government securities in exchange for bank notes. These suspensions are temporary, and as soon as the crisis is passed the Banking Department recovers its securities by paying bank notes. Because of the limitations on bank note issue and because of the greater utility of deposits, deposit banking largely supplants note issue in England.