Bank Of England

The Bank of England is merely an independent joint stock institution; but, in consequence of its acting as the banker for the Government (receiving the nation's revenue and discharging its obligations), and issuing the payments of interest upon the National Debt, popular conception usually, and erroneously, regards it as the national bank, or a department of the Government service. Without dealing with its formation and history (beyond stating that its incorporation was conceded on condition that its capital was advanced as a loan2 to the Government of William III for the prosecution of the war with France), it will be sufficient to explain its present constitution and functions. As the basis of this exposition I will examine its return (or the statement of its financial position), which is before me as I write.

1 An Accommodation Bill (Latin, accommodare, to adapt, to suit), on the contrary, is a deliberate fiction intended to impose: the "value received " which it expresses is an untruth, since no sale of goods has occurred as its justification: and the worth of the bill is the worth of the paper which the deceit defaces. It is perhaps not fancible to suggest that a bill of this nature was so called (in distinction from a genuine bill representing the exchange of goods) on account of its being simply drawn in order to fit or suit the circumstances of the parties to it in bolstering up a credit or reputation which does not really exist, by imitating a real bill.

2 The original loan of £1,200,000 has been increased by subsequent borrowings by Government to £11,015,100, and appears in the Bank's account under the title of "Government Debt."

Constitution Of The Bank Of England

The Bank, originally, was constituted similarly to our existing banks, and simply, like them, conducted its business with the same ends of the preservation of solvency and the benefit of its stockholders; no separation of functions distinguished it from the form which those banks present, and the withdrawal of its notes by payment in cash rested upon its general financial condition. But during the commercial crises of 1796 and 1825 its store of gold became so seriously depleted that its notes could not have been discharged in cash had not the Government, in the first crisis, permitted it to suspend cash payments and pay its dividend-warrants and make its discount of bills in notes alone, by means of an extension of the note circulation. During the second crisis, when a similar efflux of gold occurred, the restriction of cash payments was again suggested by the Bank, but this grave measure was happily found, in the end, to be needless. On the occurrence of similar embarrassment in the Bank's position in 1839, a committee appointed by the House of Commons recommended (on the valid ground that the solvency of the nation depended upon the condition of the Bank) that the integrity of the notes issued should (in respect of their immediate conversion into cash) bo finally placed beyond doubt or apprehension.

When, accordingly, the charter expired in 1844, a Bank Act was passed, - Sir Robert Peel affirming that the Bank Act, 1844.

primary object which he contemplated was "that the paper circulation should conform itself to gold; that it should fluctuate like gold." Upon the provisions of this Act the constitution and functions of the Bank are founded; and its essential feature is the division of the Bank into an Issue Department and a Banking Department, with a complete separation as though they formed independent institutions, excepting that the amount of notes contained in the banking department is guaranteed by an equivalent store of gold and securities in the issue department.

Issue Department Of Bank Of England

The purpose of the issue department is the preservation of the instant convertibility of notes into cash, independently of any vicissitudes of trading to which a banking business may be subjected from time to time. The security for the amount of notes for which the Bank is liable is composed of (1) the debt due from the Government, (2) other securities within a prescribed and automatic limit, while (3) the balance to make up, with (1) and (2), the amount of notes in circulation, must consist of gold coin and bullion.1

1 Bullion consists of the precious metals (gold or silver) in the mass or lump, as distinguished from coin, or bullion melted down and manufactured into coins. The term is also applied to coined gold and silver when considered, not as coins, but simply with reference to their value as raw metallic material. The derivation of the word is obscure, but it is connected with the Latin bullio, to be boiling, or to be in bubbling motion or a state of ebullition, and ultimately from bulla, which means any object swelling up and thus becoming round. The primitive notion implied, however, if correct, must have passed in process of use from that of "boiling" into that of "melting," which is the English employment of the term.

The nature of the "other securities" contained in the issue department is not specified, but, undoubtedly, they consist of the finest Government and other investments. Dealing with the bank return of September the 24th, 1908, the "other securities" were valued at £7,434,900; the "Government debt" amounted, as already stated, to £11,015,100; their sum was £18,450,000; and as the notes then issued amounted to £55,366,805,1 the difference of £36,916,805 expressed the value of the gold coin and bullion which the department then possessed as the actual protecting fund in cash for its liabilities under notes.