In 1844, there was a new regulation of the Bank of England called
the Bank Charter Act of 1844, also known as Peel's Act.
Read Wikipedia on the Bank Charter Act of 1844
This officially made the Bank of England the sole issuer of
banknotes in England, although it was functionally the sole issuer
before then. It also split the Bank into two Departments: an Issue
Department, wholly responsible for banknotes, and a Banking
Department, which was not involved in banknote issuance, and
operated more like a regular commercial bank. However, the Bank of
England's Banking Department had, by then, assumed many of the roles
of today's central banks, including acting as a central
clearinghouse for interbank payments. Thus, the Banking Department's
deposits also acted in essentially the same way as deposits at
central banks today, which are functionally a final means of
payment, which is why we now consider central bank deposits to be a
form of base money alongside banknotes.
The 1844-1913 period is nice because not only does Peel's Act
delineate this time from the period previous, but the Bank of
England also became the leading example of other governments and
central banks to follow, as the Most Perfect Monetary System Ever
Created came into being. Also, Peel's Act required weekly reporting
of the BoE's balance sheet, so there's a lot more documentation of
what was going on.
3, 2013: The World Gold Standard of 1870-1914: the Most Perfect
Monetary System Ever Created
Here's what it looked like:
This is a copy of the balance sheet, of course.
February 3, 2008:
How Banks Work
February 10, 2008:
How Banks Work 2: Shitting Like an Elephant
February 17, 2008:
How Banks Work 3: More Elephant Poop
February 24, 2008:
How Banks Work 4: Banks and the Economy
March 9, 2008: How
Banks Work 5: Selling Loans
March 16, 2008: How
Banks Work 6: Liquidy Crises and Bank Runs
23, 2008: How Banks Work 7: the Lender of Last Resort
What do we see here? Of course, there is
the Issue Department and the Banking Department.
The Issue Department has, as its liabilities,
banknotes in circulation. This is your basic paper money. It
has no liabilities except for that.
As assets, its has government debt, "other
securities," and gold coins and bullion. There's a ledger item
for silver, but by this time the Issue Department held gold
exclusively. Britain went to a monometallic (gold-only)
monetary system in 1816.
I'm not sure what "other securities" means. It
is probably debt of some sort, perhaps high-quality corporate
debt. It could be gold-based debt of other governments.
The Banking Department has, as liabilities and
equity, "proprietors' capital." This is an old accounting
convention which separates what we today call "shareholders'
equity" into the original capital of the company -- the
original investment -- and what amounts to retained earnings.
The retained earnings are the "rest." Because book value or
equity is a residual -- it is the remainder after you subtract
the liabilities from the assets -- the "rest" can vary
naturally. Also, it varied due to earnings retained
(increasing) and dividends paid (decreasing). We will see that
the "rest" is quite stable, indicating that the Banking
Department's earnings were largely paid out in dividends.
There's a ledger for Public Deposits, which
basically means the deposits of the government. Today, this is
recognized as a portion of base money.
Then, there's a ledger for Other Deposits, which
is deposits of nongovernment entities. This was mostly other
commercial banks, including foreign commercial banks, and
other governments and central banks. This is also recognized
as a form of base money today.
1, 2011: What is Money?
There's a small item for "seven day and other
bills," which is short-term borrowing by the Bank of England
on the money market.
We see here that the Issue Department's
holdings of government bonds were essentially unchanged.
Other Securities varies a bit, in a stepwise plateau
pattern. Silver bullion disappears early on. Almost all of
the variation in total banknotes in circulation is matched
by variation in gold bullion holdings.
This indicates that the Issue Department operated pretty
much in the Making Change system I've outlined before.
Simplest Practical Gold Standard System
29, 2012: Gold Standard Technical Operating Discussions 3:
Automaticity Vs. Discretion
Gold Standard Technical Operating Discussions 2: More
2012: Some Gold Standand Technical Operating Discussions
In other words, the Issue Department would trade gold
bullion and banknotes at the parity value of £3 17s
10.5d per ounce of gold. Either the Issue Department would
accept gold and give banknotes, or accept banknotes and give
gold, depending on what the private market participants
("PMPs") wished to do. Banknotes in circulation sometimes
goes up, indicating that PMPs were bringing gold to the Bank
and taking banknotes in return; or, it goes down, indicating
that PMPs were bringing banknotes to the bank and receiving
gold bullion in return.
This is identical operation to a currency board today.
Hanke in GlobeAsia, May 2012: A Gold-Based Currency Board
Note that, like a currency board today, the Issue Department
did not have a "100% bullion reserve," just as a currency
board does not hold exclusively base money (banknotes and
central bank deposits) in the target currency. Some of the
assets were interest-bearing government bonds, and also
other types of bonds. At first, gold bullion was less than
50% of total assets, or in other words, bonds were more than
50%. Bullion holdings rose over time, as a percentage of
total Issue Department assets, but as we will see later, I
think this was a reaction to the increasing importance of
Banking Department deposits as a component of base money.
The Issue Department's management sometimes decided to
increase its holdings of interest-bearing debt, in this case
exclusively non-government bonds. In this case, gold bullion
would be sold and, with the proceeds, bonds would be bought.
This operation would not change the monetary base.
It was a pretty simple system. Over time, holdings of gold
Note that this was apparently a "non-discretionary" system.
There was no day-to-day decisionmaking involved as to how to
manage banknotes in circulation. It was totally reactive, in
response to PMPs wish to transact bullion and banknotes.
For now, just think about how the Issue Department operated.
We will look at the much more complicated Banking Department