The Period of Monopoly, 1708 to 1826.

The Bank of England, which is managed by a Governor, Sub-Governor, and twenty-four Directors, was incorporated in 1694 at the suggestion of a Scotsman, William Paterson, a man of roving disposition, whose Darien expedition proved a miserable fiasco, cost Scotland some £400,000, and shattered the health of Paterson, who died in London at the beginning of 1719, if not in poverty at least stripped of nearly all his fortune.

Schemes relating to the Isthmus of Darien (or Panama), that narrow little strip of land which unites the two Americas, have proved fruitful in disaster. France's great canal venture, we all remember, resulted in huge loss and grave scandal; and Paterson lived to bitterly regret his colonisation scheme, devoutly wishing that he had pinned his faith to his finance company, the Bank of England, for a finance company it then was in every sense of the word.

Little is known of William Paterson's early career, the various accounts relating thereto being meagre and conflicting, his enemies describing him as a mere adventurer, and his friends declaring that he was actuated by the worthiest of motives. However, when it is remembered that his second great venture (the Darien scheme) involved thousands in ruin, it is evident that had the man been a saint he would not have lacked detractors, and though his public utterances sound quaintly pious to the modern ear, it seems probable that he was only an enterprising merchant, whose morality was neither better nor worse than that of the times in which he lived.

The son of a Scotch farmer, Paterson left home at an early age, and, after settling for a short time in the West of England, set sail for the West Indies, returning to Europe about 1686 with the Darien scheme in his brain. Receiving but scant encouragement in England, despite the fact that his bank had been successfully floated, he concentrated his energies upon Scotland, where his scheme fired the public imagination, almost every Scotsman with a few pounds to invest eagerly taking the money to the company, convinced that Panama was the natural commercial centre of the world, and that gold would be rained therefrom upon fortunate Scotland. The whole nation went almost frantic with the fever, for Panama, with its gold mines and its world-wide trade, was going to make Scotland rich beyond the dreams of avarice. It is estimated that nearly half the capital of the country was sunk in the Darien scheme.

Chartered by the Scottish Parliament in 1695, three vessels sailed from Leith in July, 1698, with some twelve hundred settlers on board, Paterson and his wife among the number. All Edinburgh flocked down to Leith to wish the members God-speed, and then returned to their homes to dream of the streams of gold with which Scotland was to be flooded. In a few years everybody would be rich, and Edinburgh would be the greatest and proudest city in the world. Trade, however, was destined to flow to a city a little farther south.

The scheme proved a dismal failure. England and Holland opposed the new colony; the East India Company treated it as a rival, and Spain was actively hostile. The climate did the rest. Before the close of 1699 "New Edinburgh" was deserted, and the colonists, decimated by want of provisions and disease, set sail for New York. To make matters worse, a second company meanwhile had sailed from Scotland, where the utmost enthusiasm still prevailed; but the new arrivals found the town deserted, and themselves at the mercy of the Spanish warships. Mad with rage at the lack of success of their national adventure, the Scotch openly accused the English Government of treachery, declaring that its conduct in withholding food supplies was as discreditable to it as was the butchery of Mac Ian and his clan at Glencoe in 1692, when neither old man nor child was spared, and fugitives were allowed to perish of hunger and exposure in the mountains.

Paterson's faith in Panama must have been profound. His wife died in the new colony, and he himself suffered severely in health; yet, after his return towards the end of 1699, directly his health began to improve, we read of his approaching William with a fresh Darien venture. The King naturally refused to risk a second disaster, and Paterson, like all great speculators who have risked everything and lost, could not again persuade the public to share his enthusiasm, for that mysterious entity seldom trusts a man after a cloud has obscured his "star." Once his spell of so-called good luck is broken, the public desert him in a body, when the adventurer, if he be wise, retires into obscurity with his spoil.

Paterson lived to discover that it is only a rising star, radiating success, that can obtain a sufficiently large following to finance a great scheme, and though he strove manfully to promote the new venture, his sanguine predictions were received sceptically. Nor did his subsequent schemes meet with a better reception. But he must still have retained some influence, for, after the Act of Union in 1707, he was returned to Parliament by a Scotch burgh. His chief claim to distinction, however, undoubtedly rests upon the fact that he founded the Bank of England, of which he was appointed one of the first directors.

The Bank of England, from its inception down to the present day, has never been a Government institution. It was originally simply a company that advanced money to and transacted business for the Government, which, in return, granted it certain privileges and concessions; but the connection between the Government and the Bank was so close, and their interests so identical, that public opinion connected the one indissolubly with the other. From this conception sprang the erroneous impression that the Bank is a Government establishment, when, in reality, it is no more so than is the National Provincial Bank of England or the London and County Bank.

In 1694, the Government of William III., which was generally in a state of monetary tightness, found that the war with France was draining its resources, and, having failed to raise sufficient funds by the imposition of taxes, it resolved, apparently as a kind of dernier ressort, to accept Paterson's financial scheme, which had been shelved some three years earlier; and on 27th July, 1694, a charter was granted to the "Corporation of the Governor and Company of the Bank of England."

The capital of the company, £1,200,000, was subscribed by some forty London merchants, and lent to the Government. It is only reasonable to assume that the subscribers were supporters of the Government, and that they were Whigs, whose aim, in supplying William with the sinews of war, was the crushing of James, whose pusillanimity had disgusted even his own followers at the battle of the Boyne in 1690.

Then, again, the commercial morality of the Stuarts was notoriously bad in the City. Charles I., when the City of London refused him a loan, took forcible possession of £200,000 deposited by the Goldsmiths in the Exchequer; and Charles II., in 1672, robbed them of considerably over £1,000,000. The Goldsmiths, in those days, were the private bankers with whom the London merchants left their cash, receiving an acknowledgment or receipt in return, promising payment on demand, and the Goldsmiths deposited their surplus cash in the Exchequer, just as the banks of to-day do with the Bank of England. Through this act of spoliation the Goldsmiths were unable to meet their liabilities, and many of them, together with their customers, were involved in common ruin in consequence. James II. added to the financial sins of his house by debasing the currency: so small wonder that the merchants of London had had enough of the Stuarts, whose theory of the "Divine right" of kings did not even stop short at the pockets of their subjects—always their most vulnerable point.

The Bank of England, which to-day is quite outside party politics, was at its inception a Whig finance company, incorporated solely for the purpose of lending its capital to the Government at the rate of eight per cent. per annum; and out of this creation has evolved the present "Old Lady of Threadneedle Street," whose career, if chequered, has been one of unquestionable integrity.

It is difficult even in imagination to picture to oneself the England of 1694; but it is easy to understand that in those days great storehouses of capital were non-existent—non-existent, that is to say, in the modern sense. Our huge credit institutions, which are indispensable in the twentieth century for the proper carrying on of trade, and which dive by means of branches into almost every corner of the land, thereby collecting millions of pounds of loanable capital, would have spread their tentacles in vain during the seventeenth century, when neither the money nor the facilities for its profitable employment existed in the country.

Capital was scarce—consequently the rate of interest was high—and eight per cent. was a rate at which even the Government could not borrow in the City in 1694, from ten to thirteen per cent. per annum being about the value of loanable capital, while the commission paid was oftentimes exorbitant. The Bank, which was established by the Whigs, was naturally bitterly opposed by the Tories, who saw in its success the destruction of the cause they had at heart. The capitalist class disliked it for selfish reasons; and the Goldsmiths, recognising a formidable opponent, joined issue with its enemies.

Holders of stock and everybody connected with the Bank were looked upon as enemies of the House of Stuart, which, were it restored to power, would naturally wreak its vengeance upon a company that had helped to finance William—for forgiveness is one of those abstract attributes with which only brave and wise men are blest, and James II. had not given proof of possessing either courage or wisdom. Small wonder then that the City should support the Dutchman.

The National Debt, too, was founded during the reign of William, the first loan of £1,000,000 being raised in 1693, and those persons who held it were bound by the strongest of ties—commercial ties—to William. The fund-holders were Liberal; the Bank was Liberal; and as its very life was dependent upon the existence of the Government, it seems only natural that, in the popular mind, it should have been looked upon as a Government institution, though there is but little excuse for so classing it now. The fact that so many people still share this illusion, however, clearly proves that a large proportion of the public is unacquainted with the Bank's history.

The Bank of England's charter was renewed in 1697, and again in 1708, when, in order to prevent the establishment of similar institutions, it was granted the monopoly of Joint Stock Banking in England. This it retained until 1826, when an Act was passed permitting the formation of Joint Stock Banks of Unlimited Liability beyond sixty-five miles of London, provided they had no branches in the Metropolis.

It is a long jump from 1708 to 1826, and, of course, the charter was renewed many times between the two dates, the Government generally taking advantage of each extension to force some concession from the Bank, which, as its credit and business expanded, had increased its original capital by many millions; but 1826 was the year of reform, and the intervening period possesses little interest except to the student.

Between 1826 and 1829 the Bank opened eleven provincial branches, but those which were established at Gloucester, Swansea, Exeter, and Norwich have since been closed. Joint Stock Banks were then started in the provinces, though not with very happy results, for in 1832 their reckless trading was severely stigmatised by Lord Overstone; but it was not until 1834 that the first joint stock bank, the London and Westminster, was started in London, a clause having been inserted in the Act when the charter of the Bank of England was renewed in 1833, to the effect that, provided a joint stock bank did not issue notes, it was at liberty to carry on business in the City.

Both the Bank of England and the London private bankers opposed the new bank with acerbity, the former refusing to open an account for it in its books, and the latter declining to admit it into the Clearing House. Not satisfied with this, the Bank brought an action against the Westminster. But it was quite natural that the newcomer should have been received in this fashion, for innovations, however necessary and useful, are seldom accepted rapturously in this country, which appears to have almost a Chinese dislike of the unusual. Besides, it is not the custom of the country, even for the sake of appearances, to receive a trade rival with open arms, and it would have been a little surprising had the Bank surrendered its monopoly of joint stock banking in England without a struggle, whilst its desire, after being stripped of some of its privileges, to annoy its despoilers, was, if not laudable, eminently human.

In 1836 the London Joint Stock Bank followed the example of the Westminster, and in 1839 the Union Bank of London, which has recently amalgamated with Messrs. Smiths, opened its doors, while such well-known banks as the National Provincial Bank of England and the London and County Bank were formed in 1833 and 1836 respectively. The trade of the country had by that time far outgrown the resources of the Bank of England, which was quite unable to minister to the increasing demands of a prosperous and progressive England; and to-day the only monopoly which the Bank enjoys is that left to it by the Act of 1844.

From William and Mary to Victoria, in whose reign the Act of 1844—that Magna Charta of the banking community—was introduced, covers a most interesting period in the history of the nation, whose development had been retarded by the "Divine right" of the Stuarts, which cost Charles I. his head and James II. his throne. The theory is much in evidence to-day, though it now takes the form of a great abstract idea, not compatible with practical politics, and which has found a resting place in the heart, rather than in the head, of the people—for the practical twentieth century has a strange trick of banishing disproved theories from the head to the heart; and perhaps it is this national trait which saves the country from violent revolutions.

It would be a mistake to assert that commerce had declined under the Stuarts. It increased rapidly in spite of them; but, after the "Glorious Revolution," the "Divine right" of kings became a mere theory in this country, and the power of the Crown was made subservient to the will of the people. In short, the rule of Parliament began. The trade of the country gradually expanded, and with it the influence of the Bank.

In order that we may thoroughly grasp the position previously occupied by the Bank of England, and the influence given to it by its connection with the Government, it will be better, before briefly discussing the Act of 1844, to revert to the days when the sway of the Bank of England was absolute.

In 1708, we know, the Bank was granted the monopoly of joint stock banking in England, and, further, it was made illegal for any private firm, whose partners were more than six in number, to conduct the business of a banker. This restriction was not removed until 1857, when the partners in a private bank might consist of ten, and it will be seen from the following facts that this limitation was harmful to the best interests of the country.

One result of this hard-and-fast enactment was the encouragement of small private banks in every county of England; but the fact that the number of their partners was limited to six effectually checked their expansion, and finally brought hundreds of them to the ground; for they could not strengthen themselves, and add to their resources, by amalgamation as is now possible.

As the population of the country increased, the position of the private bankers, as a class, became precarious, especially in rapidly growing commercial centres, because their supply of loanable capital was insufficient to meet the increasing demands of their clients. In their attempt to finance their customers they neglected to maintain adequate reserves, and consequently failures were numerous directly any very considerable demand was made upon them.

Instead of a few large and powerful banking companies, there existed numerous weak private firms, which, in many instances, had advanced out of all proportion to their total working resources, thereby sacrificing security to large profits. So long as times were good all went merrily; but, unfortunately, the great impetus given to trade by the conclusion of peace with France and the United States in 1783 did not last more than five or six years.

The year 1789 brings us to the French Revolution, and in 1793 we were at war with France again. Then came the reaction. Country bankers failed in every direction; but in 1797 Mr. Pitt came to the rescue in order to relieve the Bank of England, and the directors of the Bank were allowed to issue notes at their discretion, cash payments being suspended. Between 1792 and 1820 over one thousand private bankers put up their shutters; and during the 1825 crisis sixty-five banks closed their doors, hundreds of their customers being ruined in consequence. The panic of 1825, which almost emptied the Bank's tills, thoroughly convinced the Government that the country had outgrown the monopoly of the Bank of England.

By limiting the partners in private banking companies to six in number, and prohibiting the establishment of joint stock banks in opposition to the Bank of England, the Government sanctioned a policy which could not but result in disaster. Like most monopolies, that of the Bank of England was framed to exclude powerful rivals, and to keep those in opposition small and weak; and the result was disaster and ruin in every direction. The greater the trade of the country, the more apparent became the evil, until even the Government was compelled to decide that the monopoly of the Bank of England must forthwith be curtailed.

Small tradesmen were quick to realise the possibilities attached to an unlimited issue of notes, and hundreds of them combined the business of banking with their retail trades, for, although the law placed every obstacle in the way of sound banking, it encouraged small men, who possessed little or no capital, to engage in a business which should be conducted with much capital and great caution. The country was flooded with the notes of these so-called bankers, who, directly their notes were presented for payment in large numbers, failed by the dozen.

A system which encouraged all that was bad, and excluded everything that was sound and secure, was naturally doomed to extinction; and small wonder that in 1826 the era of country joint stock banking began. Like most fresh ventures which cannot be guided by precedent, it began disastrously, for the simple reason that those who were responsible for the guidance of the new companies had to learn from experience—a very bitter school. But the new banks laboured under fewer disadvantages than the old private bankers, and the Bank Act of 1844, we shall see, clearly defined their position.

We can now understand why the private banker was never a great success in this country. He was of course sacrificed to the monopoly of the Bank of England; for although six very rich capitalists could conduct a large banking business, the resources at their command would not be sufficient to enable them to extend their branches throughout the country. Consequently, before the advent of the joint stock banks we find the private banker, broadly speaking, confining his connections to a particular district or county.

It is true that he enjoyed free trade in banking down to 1844; but the regulation as to the number of partners in his business necessarily confined his offices or branches to a limited area, and effectually prevented his expansion on a large scale; so we get influential houses in the various counties, such as the Gurneys in Norfolk and Suffolk, the Smiths in Nottingham, and so on. It is noticeable, however, that both these well-known private firms, recognising the applicability of the joint stock system to the times, have surrendered their note issues, and taken a place in the modern movement, evidently foreseeing that, in order to progress, they must adopt the methods of their more successful rivals.

Undoubtedly, the country was not ripe for such a movement until the beginning of the nineteenth century; and though the number of partners in private banking firms was extended to ten in 1857, this concession by no means placed the private banker on an equal footing with the joint stock companies, which could increase their members or partners by the issue of additional capital whenever it became apparent that their business was rapidly progressing. The private banker, had he desired to farm some dozen counties, would have been compelled to find a few large capitalists to join hands with him, whereas the joint stock banks had only to obtain hundreds of very small ones, and it is quite evident that the companies possessed infinitely the easier task. In fact, down to 1844 the monopoly of the Bank of England prevented their rapid growth. Then came the period of, so to speak, free banking; but not for the private firms.

People are constantly asking: Why did not the private bankers establish themselves firmly in the country and progress? They were first in the field, and, had they been well managed, surely they would have been as progressive as their joint stock rivals.

But we know that the law never gave them the remotest chance. How could they progress on a really gigantic scale when their partners were limited to six? The law literally forced them to stand aside; and in 1826 and 1833 only the joint stock system profited by the concessions wrung from the Bank of England, because by that system alone could sufficient capital be obtained to enable a bank to farm the country from south of the Tweed to Land's End.

Of course the private banker was at liberty to adopt the joint stock system at an earlier date, but he did not at first believe in the new movement, and, consequently, clung to his own system until he was far outdistanced by his competitors, for directly the country was relieved from the incubus in the shape of the Bank of England's monopoly, and the joint stock system was given a free hand, that system, as might have been expected, instantly began to forge ahead, and in a very short space of time the private banker, who to this day cannot admit more than ten persons into partnership, was left hopelessly behind by a system which was unfettered by legal restrictions and allowed fair play.

The Bank of England's monopoly reduced the private banker to impotency. It fostered in every county of England dangerously small firms, which disappeared in hundreds as soon as credit became bad and a state of panic caused their notes to be presented for payment in unusually large numbers, and it made really great private banking companies impossible in England; while but for the fact that public opinion wrenched this power from the hands of the directors, the Bank and its monopoly, which encouraged a dangerous form of banking, might both have been swept away in a bad financial crisis.

Fortunately, public opinion won the day; and though the private banker could not compete successfully against the joint stock system on account of the smallness of his capital compelling him to concentrate his energies in a particular district, that system, being unrestricted, soon covered the land with its branches. The private bankers were at first held in check by the Bank of England's monopoly. Now they are simply being smothered out of existence by the extension of a system of which, in a manner, though, of course, not in the modern sense, the Bank was the first exponent; for a banker, at the beginning of the nineteenth century, was largely dependent upon his note circulation for his profit, our present system of deposit banking being then in its infancy. In fact, the one evolved out of the other.

If a person held one hundred pounds in bank notes, it could not but occur to him that he was in reality lending the issuer one hundred pounds entirely free of interest; and as he possessed sufficient confidence in the banker to lock up the notes in his cash box, it was only going one step farther to deposit his money at his bank and draw out the cash as he required it. Obviously, too, if he exchanged the notes for a deposit receipt, he would receive some interest upon his money; and as the receipt could be held equally as safely as the notes, he naturally adopted the plan that was the more profitable to himself. So, although in 1826 the joint stock banks in the country attached great importance to their circulation, their notes rather took the form of an advertising medium for attracting deposits, or, at least, became a means to that end, for the progressive banks did not hesitate to sacrifice their note issues in order that they might open branches in London.

We find, then, that the joint stock banks at first attempted to place as many of their notes as possible among the public, and that, by the process already explained, the holders of their notes gradually began to deposit with them, until, by degrees, our present system of deposit banking obtained a firm hold upon the habits of the people. As the trade of the country expanded, the cheque rapidly drove out a large proportion of the bank notes in circulation; and though the issue of notes certainly introduced deposit banking in this country, modern requirements have made cheques and bills of exchange the media for the transference of credit. Such being the case, the note issues of the larger joint stock banks became of secondary importance to them; and, rather than remain outside the Metropolis, we have seen that they sacrificed their notes to the monopoly of the Bank of England.

From 1708 to 1826 the Bank of England owed its predominant position entirely to monopoly, and enough has been written to show that its sway was not an unmixed blessing to the country. The private banker, without a shadow of doubt, can trace his lack of progress to the restrictions placed upon his business by the Bank charter; and the joint stock companies may certainly be said to have succeeded in spite of the Bank; yet no greater compliment can be paid to any institution than to assert that it has earned the respect, if not the love, of its enemies; and such undoubtedly may be truthfully affirmed of the "Old Lady of Threadneedle Street," even when her rule was autocratic and her rivals' dislike of her intense.