We have reached the crucial moment in the history of money. To the spread of paper money.
Which European country was the first to issue paper money? It is really difficult to define it clearly. On the one hand, bearer’s certificates issued in exchange for depositing gold appeared in 17th century England. They can be considered as the originals of banknotes. By convention, historians admit, however, that Sweden was the first state that emitted strictly paper money.
Let’s look more closely at England. In 1640, King Charles I decided to untie his subjects from trusting state institutions and came up with – in his opinion, probably a genius – idea. He confiscated the gold that the citizens of his country had entrusted to the mint. Effect? The English have since begun to hold gold on goldsmiths. They in return issued paper confirmation of their acceptance. They functioned on the market like money.
Goldsmiths were considered an elite of small entrepreneurs, hence they quickly came up with a truly devilish plan. After all, it is unlikely that all customers would at the same time want to extract metal from them. They began to emit more receipts than they had gold at home. Sounds familiar? Well, someone wise once said that humanity does not change, only the decorations change …
The solution was great, but only in times of peace, when people did not want to massively extract gold. In 1672, there was an economic crisis in Europe. In England, all the commotion was accompanied by the suspension of state debts (again sounds familiar?), But also the collapse of many less reliable goldsmiths. These events provoked a discussion about the need for a central bank.
There were turbulent talks on the subject during the deliberations of the parliament. The Whigs were afraid that the existence of such an institution would only strengthen the king’s power and would allow the court to hide inflated costs from the citizens. The Tory people were of a different opinion. They believed that the public bank would weaken the role of the ruler because the public bank associated them with the republican regime.
Bank of England
In the end, in 1694, under the Tonnage Act (ie a document with an extremely sexy title: “The Act on the Transfer of Various Fees to Boats and Boats to the JKM Regulation”), the Bank of England was established. For his designer is considered Scot (known, famous for avarice, so the guy was ideally suited perfectly), William Patterson. During this period, the government needed money for another war. Where do the authorities take funds for such activities? Taxes! This is what the stewards of England have done. They imposed a levy on cargo transported by water. However, the private company was responsible for collecting the tax in exchange for a loan of £ 1.5 million to the government. On this occasion, said Patterson had the idea of starting a bank.
However, the Bank of England was a joint-stock company and was regarded as an entity independent of power. Until 1946, he was put up as a model in this regard.
The Bank was managed by the General Meeting of Shareholders, which elected a 26-member Board of Directors. The latter chose the governor and deputy governor. Interestingly, the governor had to come from outside the Bank (he could not be his employee), and his deputy was just the opposite – he had to have a CV in the CV about work at the Bank of England. Where does this idea come from? The idea was to block the creation of clicks inside the institution. In terms of the election of directors and governors, the state authorities had nothing to say.
Issuance of banknotes
The Bank of England has been granted the right to issue money for a period of 12 years. This period was then extended. In 1707, banknotes were banned from larger companies. Private banks could have issued them, which played an important role in the province.
The Bank of England banknotes in circulation could not be less than £ 5. Significantly, it was thought that paper money was dedicated to the elite, the poor still had to pay with coins. Does it remind you of today’s situation with payments by digital currencies or using mobile applications that can be used by people who are better acquainted with technological novelties?
The functioning of the Bank turned out to be quite a positive phenomenon for the economy. We managed to stabilize the exchange rate (in previous parts of this series you can read the inflation with which Europe previously fought). In 1717 (one of the few dates easy to remember), Isaac Newton, who was the director of the king’s mint, set the pound parity at 7,322385 g of gold. This value lasted until 1931. In this century, the pound was also a bimetallic currency. However, it was possible to regulate silver from 1774, only smaller amounts – up to 25 pounds.
Other central banks
A year after the Bank of England, the Bank of Scotland was formed, but it was not a monopolist, just like its English counterpart. In 1727, the Royal Bank of Scotland was founded, and in 1774 the British Linen Company Bank. All stock banks could also issue their banknotes.
In 1783, the Bank of Ireland joined this group. In 1706, Saxony decided to create a central bank, seven years later Denmark.
It all leads us to one of the most fascinating characters in the history of finance. However, due to the fact that this series works as a Venezuelan series -wait for the follow-up …