Bank Charter Act

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, 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. 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 was institutionalized in Britain, creating a ratio between the gold reserves held by the Bank of England 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 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, 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, 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 four 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".

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 – a list of note-issuing banks in the Sterling area
** Banknotes of Scotland
** Banknotes of Northern Ireland
* Fractional reserve banking
* Central bank

References

External links

*
Bank Charter Act 1844
- full text
{{UK legislation

United Kingdom Acts of Parliament 1844
Banking legislation in the United Kingdom
1844 in economics
Robert Peel