This seems to be the fitting place for explaining the manner in which bank-notes are issued in England, more especially under the Statute of 1844, which re-organised the issues of the Bank of England, and made provision for the ultimate condition of the paper currency of England.
Up to the passing of this Act, it was open to any bank or private person to put forth bank-notes. One condition only was imposed as a guarantee of their value. They were required to be convertible, payable on demand. Not to pay a bank-note on presentation was an act of bankruptcy, and the issuer passed at once under the laws of insolvency.
There probably has never existed a law whose meaning has been so vehemently and incessantly disputed, and is disputed still, as the Bank Charter Act of 1844. No one has accused it of obscurity of language: what it prescribes is most simple, easy to be understood, and equally easy of execution. No one raises a question as to what is legal, and what not, under its provisions: yet the significance of the Statute, what its enactments effect or do not effect, whether it is a revolution or a beneficial law, are matters of the most differing and most bitter interpretation. It is regarded as the destroyer or the saviour of trade.
In examining the nature of this Statute, let us pursue the method adopted by all judges in considering an Act of Parliament in a Court of Law. They take no notice of speeches delivered in Parliament by its authors. What they aimed at, what they supposed the measure they advocated to enjoin, counts for nothing, if the language of the law is clear. The Court looks at what the Statute says, and at nothing else: from that the Court learns what it is. We will follow this path, examining each point that presents itself.
1. The Act divides the Bank of England into two departments, one the Banking Department, the other the Issue Department. The latter is exclusively concerned with the issuing of notes. That operation is carried out under fixed rules laid down in the Statute and the vital point to observe here is that the corporation called the Bank of England has no voice, discretion, or control over the issues. In the Issue Department the Bank Directors have no more authority or right to speak or act than any other person in the kingdom. The Banking Department is the Bank of England, pure and simple, as private a bank as any other bank in the country. As such, as a private bank, it possesses two advantages: a very big customer in the Government account, and a special benefit from the bank-notes conferred on it by the law.
2. The Act limits the quantity of bank-notes issued by private banks in the nation to the quantity existing at the time when the Act became law. If any of these private issuers cease to issue, the bank-notes assigned to them lapse, and the amount of the whole private issue becomes permanently reduced by nearly that amount.
3. The Bank of England, the private bank so called, is authorised to receive from the Issue Department fourteen millions of notes, with a certain proportion of the lapsed private issues, as they lapse. The quantity stands now at about fifteen millions. These bank-notes the Bank receives from the Issue Department - (which, in reality, is an office of the State) - on the condition that it shall give gold for them to the public, whenever they are presented for payment. Of course this fact may be regarded as meaning that the Bank of England is a direct issuer of notes to the extent of fifteen millions, but it is far simpler and truer to look upon the Bank as a receiver, for special reasons, of so many notes from the sole issuer, the office of the State called the Issue Department. The Bank is subject to the further condition that it shall invest these fifteen millions in securities on which it receives the interest, They are invested at three per cent.
4. Bank of England notes are declared to be legal tender everywhere except at the Bank itself. The Bank cannot pay its debts with bank-notes, as being legal tender. Any of its creditors may decline them.
5. Every note is payable at the premises of the Bank of England - some out of its private resources, the remainder at the State office, called the Issue Department. The law further enacts that all the notes issued by the Issue Department beyond the fifteen millions, shall be covered for this payment by a deposit of gold kept in the Department. The whole issue thus consists of two parts: one, now fifteen millions, assigned to the Bank of England, and payable by it, the remainder put forth by the Issue Department in exchange for gold given to it by the public, and kept permanently in the vault to guarantee convertibility.
Such are the main provisions of this much-debated statute - it remains now to ascertain their practical significance.
1. In the first place it is obvious that it sentences the private issues in England to extinction by a process of greater or less duration. Many causes are ever at work causing private banks to cease issuing; sometimes leading partners die, and the bank comes to an end, or, as was the case recently with the National Provincial Bank of England, a bank voluntarily abandons country issues in order to acquire the right of carrying on banking in London, a privilege refused by law to joint-stock banks issuing bank-notes. It is obviously the intention of the statute that ultimately Bank of England notes shall be the only paper currency of England. This intention is further marked by the privilege of legal tender (save always at the Bank itself) granted exclusively to the Bank of England.
2. Ultimately the bank-notes, uncovered by an actual lodgment of gold to secure convertibility, will be limited to the amount which will accrue to the Bank of England when all the private issues shall have disappeared, but the solvency and convertibility of these particular notes will be secured by the investment in securities to their amount required by the Act.