There were many reasons why the Bank of England became the great central organisation for determining the value of money or capital in the market. We have already seen that it possessed the exclusive right of joint-stock banking until the year 1826. In addition to this monopoly, the large capital at its command gave it a position above other institutions as a lender of money.

Besides its capital, the Bank had the privilege of issuing notes, which, of course, meant additional resources. In the year 1718 the note issue was £1,829,930, and has rapidly increased until the present year, when it amounted to £48,000,000. Thus from two sources, viz., subscribed capital and note issue, the Bank of England became a formidable opponent to the other bankers. We can therefore understand how a single bank with large resources became a great power, and assumed the responsibility of fixing the rate, or the price for the loan of capital.

There was, however, another cause tending to give the Bank a predominant position, viz., it became the custodian of the money belonging to the State. Again, when the Government required a loan it was called upon to carry out the transaction. At various times, therefore, it had large resources at its command. Our National Debt was built up by its aid, and thus from an early period the Bank and the Government have been allied.

In return for services rendered to the State, the Bank naturally looked to the Government for assistance during commercial crises and panics. The privileges bestowed upon it were therefore: 1st. The use of the Government balances, which at times are very large. For example, on the 9th January, 1895, the amount was £6,200,000. The community naturally thought that if the Government could trust the Bank, its savings would be quite secure. 2nd. It had, as we have seen, the monopoly of joint-stock banking until the year 1826. This gave it a good start before other joint-stock banks came into existence. 3rd. It was the only joint-stock bank in London which could issue notes. Thus from many singular events the Bank became the holder of the cash reserve.

There is rather a curious illustration showing the connection between the Bank and the Government. In the year 1797 Mr. Pitt, as Chancellor of the Exchequer, was afraid there would not be enough specie in the Bank to meet foreign payments, and therefore compelled it not to pay gold for notes issued. Naturally a bank which had the privilege of not paying cash for its notes must obviously assume a commanding position - in fact, it was an institution with a charmed existence. There are, however, two incidents in its history which materially assisted towards making it the principal dealer in capital, and in such capacity to state the price for its loans.

The first was in consequence of the London banks opening accounts at the Bank of England. These banks found it convenient to keep their reserves with that institution, because its premises were better protected, and also for the reason that the Bank issued notes, which could be retained far better than gold in their tills. Bank of England notes being a legal tender for payment of debts, liabilities could be discharged, thus avoiding the use of gold to a large extent.

The balances of the London banks have at times been large. Thus in 1844 the amount was £1,000,000, but in 1872 the amount was £7,500,000.

In 1853 these balances never exceeded the reserve by 20 per cent, but in recent years the proportion has been 50 per cent.

During the panic years of 1847, 1857, and 1866 the reserve of the Bank of England was insufficient to meet the bankers' balances.

This additional capital which the Bank obtained from the London banks considerably augmented its resources, and any sudden withdrawal of these reserves must react upon the rate of discount, when such rate fluctuates with the amount of reserve.

The second incident in its history was that it assumed the position of a lender of capital to outsiders, that is, to those who did not keep a banking account with it. This is quite different from the practice of the English banks.

In times of panic and commercial crises a great number apply for loans at the Bank of England. The statistics given for the panic years of 1847, 1857, and 1866 show to what extent the community applied for assistance when needed. It has lent largely at various times, and therefore we find that during the present century the Bank has gradually assumed a responsibility over the money market by rendering assistance to the commercial community. At such times all those who were possessed of good security were assisted by the Bank. The importance of this policy cannot be overrated, because, as we have seen, English trade is conducted by means of borrowed capital, and if the trader could not discount his bills he would soon be obliged to suspend payment.

The merchant purchases goods and pays for the same by means of bills drawn upon him, say three months hence, and he is only able to meet such bills by discounting others received for goods sold. It is therefore of vital importance that he should be able at all times to obtain capital by means of bills discounted. The Bank of England has therefore been of immense service to the commercial community at periods when capital is scarce or a feeling of distrust has pervaded the mercantile world. Its good management is therefore of the highest value. Thus when the deposits of other banks have diminished in consequence of a want of confidence on the part of the depositors, the deposits of the Bank of England have invariably increased.

With regard to the note circulation, the action of the Bank is purely mechanical; in fact, as Mr. Bagehot stated, the office could be removed to Somerset House.

The Bank is allowed to issue £16,800,000 of notes against securities, but for any amount issued in excess, the Bank must hold gold and silver in reserve. This limit was fixed by the Act of 1844, in order to secure the convertibility of the note.