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The Bank Charter Act 1844 ( 7 & 8 Vict. c. 32), sometimes referred to as the Peel Banking Act of 1844, was an Act of the
Parliament of the United Kingdom The Parliament of the United Kingdom of Great Britain and Northern Ireland is the supreme legislative body of the United Kingdom, and may also legislate for the Crown Dependencies and the British Overseas Territories. It meets at the Palace ...
, passed under the government of Robert Peel, which restricted the powers of British banks and gave exclusive note-issuing powers to the central
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
. It is one of the Bank of England Acts 1694 to 1892.


Purpose

Until the mid-nineteenth century, commercial banks in Britain and Ireland were able to issue their own banknotes, and notes issued by provincial banking companies were commonly in circulation. Under the 1844 Act,
bullionism Bullionism is an economic theory that defines wealth by the amount of precious metals owned. Bullionism is an early and perhaps more primitive form of mercantilism. It was derived, during the 16th century, from the observation that the Kingdom of E ...
was institutionalized in Britain, creating a ratio between the gold reserves held by the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...
and the notes that the Bank could issue, and limited the issuance by English and Welsh banks of non-gold-backed Bank of England notes to up to £14 million. The Act also placed strict curbs on the issuance of notes by the country banks, barring any new "banks of issue" in any part of the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Northwestern Europe, off the coast of European mainland, the continental mainland. It comprises England, Scotlan ...
and thus beginning the process of centralizing banknote issuance. The Act was a victory for the British Currency School, who argued that the issue of new banknotes was a major cause of price inflation. Although the Act required new notes to be backed fully by gold or
government debt A country's gross government debt (also called public debt or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit occu ...
, the government retained the power to suspend the Act in case of financial crisis, and this in fact happened several times: in 1847 and 1857, and during the 1866 Overend Gurney crisis. Also, while the act restricted the supply of new notes, it did not restrict the creation of new
bank deposits A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below. ...
, and these would continue to increase in size over the course of the 19th century. Bank deposits are sums of money that a bank, backed by considerable collateral, may choose to deposit in the holder’s account as a loan which requires repayment with interest. The money comes into existence when the bank creates the deposit, and when the loan is paid off, the money disappears from the bank’s balance sheet. While a loan is effectively a cash advance provided by the bank to the customer, in the long term the effect of unrestricted creation of bank deposits (money) can lead to inflation in the markets into which that money is channelled, such as the property market through banks' mortgage lending. As a result of the Act, as provincial banking companies merged to form larger banks, they lost their right to issue notes. The English private banknote eventually disappeared, leaving the Bank of England with a monopoly of note issue in England and Wales. The last private bank to issue its own banknotes in England and Wales was Fox, Fowler and Company in 1921. The Bank Notes (Scotland) Act 1845 adopted a year later was more lenient, allowing banks in Scotland to issue more than their 1845 circulation amount, as long as the additional circulation was backed pound-for-pound with gold reserves at head office. Merging banks were also allowed to combine their issues. Today three commercial banks in Scotland and three in Northern Ireland continue to issue their own sterling banknotes, regulated by the Bank of England.


Banking Act 2009

The Banking Act 2009 abolished the "weekly return" of the number of banknotes issued by the Bank of England: "Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect".


Outcomes

The Cambridge economic historian Charles Read has argued that this legislation reduced Britain's fiscal capacity to pay for humanitarian relief during the Great Famine in Ireland (18451852), and that it also made the financial crises of 1847, 1857 and 1866 worse than they would otherwise have been. (More traditional explanations for the UK Government's decisions to withhold relief and intervention are given in the article about the famine.)


See also

* Henry Meulen – a critic who saw the Bank Charter Act as a cause of economic depression and political revolution *
Banknotes of the pound sterling The pound sterling (symbol: Pound sign, £; ISO 4217 currency code: GBP) is the official currency of the United Kingdom, Jersey, Guernsey, the Isle of Man, British Antarctic Territory, South Georgia and the South Sandwich Islands, and Tristan ...
– a list of note-issuing banks in the Sterling area ** Banknotes of Scotland **
Banknotes of Northern Ireland Banknotes have been issued for use specifically in Northern Ireland since 1929, and are denominated in Pound sterling, pounds sterling. They are legal currencies, but technically not legal tender anywhere (including Northern Ireland itself). Th ...
*
Fractional reserve banking Fractional-reserve banking is the system of banking in all countries worldwide, under which banks that take deposits from the public keep only part of their deposit liabilities in liquid assets as a reserve, typically lending the remainder to ...
*
Central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...


References


External links

*{{UK-LEG, path=ukpga/1844/32, title=Bank Charter Act 1844, type=ukpga
Bank Charter Act 1844
- full text United Kingdom Acts of Parliament 1844 Banking legislation in the United Kingdom 1844 in economic history Robert Peel