7.3 Rechartering the Bank of England

The Bank of England's charter expired in 1833, and this seemed to offer critics of the existing system a golden opportunity to effect a fundamental reform. A bank charter committee was selected by the House of Commons in 1832 to engage in a detailed enquiry into the banking system, focusing on the question of the bank's existing monopoly of bank note issue in London and environs. The committee's hearings and inquiry was the most thorough examination of British banking to date, but Parnell, the only member of the committee to vote against rechartering the bank, complained with some justice that the roster of witnesses was stacked against the proponents of free banking by the manoeuvres of the chancellor of the exchequer in Lord Grey's Whig government, the Viscount Althorp.¹²

It was clear that a consensus of witnesses was building towards centralizing note issue in the hands of a strengthened Bank of England, a policy both the currency school, in its misguided way, and the moderately inflationist Establishment, could support. Only a few witnesses favoured bank competition in note issue in London, and only one, the Manchester merchant and joint-stock banker Joseph Chesborough Dyer, opposed the fateful proposal to invest Bank of England notes with legal tender power.

Based on the committee inquiry, Viscount Althorp presented Parliament in 1833 with his legislative programme: to keep the status quo of bank charter and bank note-issue monopoly in London and a 65-mile radius, and to centralize banking further by granting bank notes legal tender power. This meant that, from then on, private and joint-stock banks need not keep any of their reserves in gold, since depositors and note-holders would be compelled by law to accept bank notes in payment; and that only the Bank of England itself would have to meet its contractual obligations to redeem its notes or deposits in gold. This measure of 1833 went a long way to reduce the role of gold coin in everyday life, and to encourage its replacement by bank notes and bank deposits. In presenting his programme, Althorp noted that since the committee hearings, ‘the public have been more inclined to look favourably on the management of the Bank of England...’. In short, the loaded committee had done its work well. He further provided a harbinger of the future by stating that his goal was to have all bank notes issued by the Bank of England — which of course is the modern centralized banking system.

The powerful country banking lobby, however, rose up in high dudgeon at this threat to its note-issue privileges, and the Cabinet was forced to back down on its goal of note-issue monopoly for the Bank of England. Lord Althorp was so chagrined at this successful pressure that he almost resigned from the government.

Although there was only one witness against it, the legal tender provision for Bank of England notes only carried in Commons by virtue of support from arch-inflationists opposed to the gold standard; the vote for legal tender was 214 to 156, with hard-money stalwarts Sir Henry Parnell and Sir Robert Peel, the leader of the Tory opposition, voting against.

Outrage against the legal tender law among the public was led, as might be expected, by the country bankers. The committee of country bankers, led by Henry William Hobhouse, pointed out that the law would ‘violate private rights, and secure to the Bank of England an unjust and perpetual monopoly’. The committee's memorial justly pointed out that the government had taken measures against the expansionary tendencies of the country banks, but had ignored the ‘operation of the same principle’ at work in the Bank of England, in its case unchecked by the competition of other banks.

Leading the public reaction against legal tender was the prolific free banking advocate, the Scottish attorney Alexander Mundell. Mundell warned that the 1833 law would lead to the centralization of specie reserves in the country into the hands of the Bank of England. He charged that ‘Your [English] industry, which has been already taxed by the exclusive privileges of the Bank of England as it now exists, is thus to be taxed still more by extension of it’.¹³