Between the ‘Bank Screw’ and ‘Affording Assistance’. Rules, Standards, and the Bank Charter Act of 1844
| Date | 01 January 2020 |
| Published date | 01 January 2020 |
| Author | Iain Frame |
| DOI | http://doi.org/10.1111/1468-2230.12467 |
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Modern Law Review
DOI: 10.1111/1468-2230.12467
Between the ‘Bank Screw’ and ‘Affording Assistance’.
Rules, Standards, and the Bank Charter Act of 1844
Iain Frame∗
This article explores a dilemma at the centre of the monetary order: how to counter inflation
eroding the value of money and simultaneously allow bank-created credit to meet the needs
of an expanding economy. Building on recent scholarship on the history of money, the article
analyses the Bank Charter Act of 1844 and the financial crisis of 1847 to reveal a response to this
dilemma which continues to shape the modern context. That response relies on ex ante restrictive
measures in a bid to limit the discretion of the monetary authorities and cultivate financially
prudent behaviour. Yet the history of the mid-nineteenth century exposes the challenges faced
by those who enforce such rules, challenges which tie the mid-nineteenth century to the post
2008 reforms in both the US and the Eurozone, and reveal the ongoing force of the dilemma:
that simultaneous desire for both expansive credit and sound money.
INTRODUCTION
A little reflection makes it appear a monstrous proposition that . .. the conduct
of so important a branch of finance as the paper circulation of the State should
be intrusted, without any control, to twenty-four irresponsible merchants [the
directors of the Bank of England], to whom power is thus given which affects
more or less the property of every subject of the realm.1(Samson Ricardo, 1837).
I attribute the whole pressure of the last year [1847] to the positive restriction
placed upon the Bank [of England] by the Act of 1844; if that restriction had not
been in existence . . . when the public required a further issue to supply notes and
coin withdrawn from circulation, I believe there would have been nothing like the
distress occasioned.2(Horsely Palmer, 1848).
The ‘monstrous proposition’ feared by Samson Ricardo was the Bank of Eng-
land’s discretion over the creation of paper money. The ‘positive restriction’
identified by Horsely Palmer was the Bank Charter Act of 1844, the very
legislation enacted to curb the discretion Ricardo saw as ‘monstrous’. Ricardo
and the other critics of the Bank of England (BoE), including the so-called
∗Lecturer in Law, Kent Law School. For comments and advice on earlier drafts of this paper, I
thank Donatella Alessandrini, Emilie Cloatre, Christine Desan, Didi Herman, Iain Ramsay, Thanos
Zartaloudis, and the anonymous referees. All errors remain my own.
1 S. Ricardo, Observations on the Recent Pamphlet of J. Horsely Palmer (London: Charles Knight,
1837) 37.
2 Testimony of H. Palmer, First Report from the Secret Committee on Commercial Distress (HC, 1847-
48, 395-VIII) Q 2205.
C2019 The Author. The Modern Law Review C2019 The Modern Law Review Limited. (2020)83(1) MLR 64–90
Iain Frame
‘currency school’ of monetary theorists, pointed to the BoE’s discretion over
money creation as one example of the ‘vast powers wielded by that estab-
lishment’3which left other banks ‘wholly at [its] mercy’.4The Act of 1844
countered such vast powers by forcing the BoE to back its paper note issue
with reserves of gold. To its supporters that made the Act an ‘indispensable
ingredient’,5one which provided holders of paper money with security by
countering ‘caprice and arbitrar y action’ on the part of the BoE ‘uncontrolled
by any legal limit’.6
Yet, between 1844 and 1866 the government suspended the Act during
financial crises on three separate occasions. Each suspension responded to
concerns that the Act was too restrictive, concerns Palmer was not alone
in holding. Others chided the ‘rigid inflexible spir it’ of the Act,7referring
to it as a ‘straight-waistcoat’8that ‘unjustly restricts the banking business of
the country’9and leaves commerce ‘cramped and paralyzed’.10 According to
the currency school’s arch-opponent and leading figure in the rival ‘banking
school’, Thomas Tooke, the strict enforcement of the Act led to ‘ridiculous
. . . lamentable catastrophe’.11
This encounter between constraints and flexibility captures a dilemma which
cuts to the core of the monetary order. Money creation by commercial banks
is central to that order. Banks create money by extending credit to others in
the form of a promise to pay in the state’s currency. So leveraging the state’s
currency is a hugely dynamic arrangement because it allows the credit sys-
tem to respond to the needs of those capitalists these banks deem of sufficient
creditworthiness.12 But it is also a fragile arrangement because the credit ad-
vanced is a bet on future productivity.13 From that fragility follows one half
of the dilemma. Should those who create the state’s currency extend support
to commercial banks? To refuse to do so raises doubts about the viability of
these banks and about the viability of the credit they create. In the absence of
such viability Palmer’s ‘distress’ and Tooke’s ‘ridiculous . . . lamentable catas-
trophe’ follow: contractual counterparties go without payment; manufacturers
sell assets to keep creditors at bay; wage earners are laid-off. And yet, although
extending support to commercial banks counters this distress, it also reveals the
flip-side of the dilemma. Where the monetary authorities can create money at
will, what is to stop these authorities from doing so to benefit special interests
3 W. Clay, HC Deb vol 95 col 587 2 December 1847.
4 R. Peel, HC Deb vol 75 col 861 13 June 1844.
5 Testimony of J.G. Hubbard, Report from the Select Committee on Bank Acts (HC, 1857, 220-X)
Q 2351.
6ibid Q 2463.
7 E.S. Cayley, HC Deb vol 92 col 247 30 April 1847.
8 Lord Ashburton, The Financial and Commercial Crisis Considered (London: John Murray, 2nd ed,
1847) 9.
9 Editorial, ‘The Present Position of the Issue Department of the Bank of England’ October 1847
Bankers’ Magazine 469.
10 Editorial, ‘The Foreign Exchanges and Our Home Currency’ July 1844 Bankers’ Magazine 226.
11 T. Tooke, History of Prices (London: Longman, 4th ed, 1848) 318.
12 See J. Schumpeter, The Theory of Economic Development (1911, Cambridge, Mass: Harvard Uni-
versity Press, Eng tr, 1936).
13 C. Desan, Making Money: Coin, Currency, and the Coming of Capitalism (Oxford: OUP, 2015)
428.
C2019 The Author. The Modern Law Review C2019 The Modern Law Review Limited.
(2020) 83(1) MLR 64–90 65
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