Tuesday, 20 November 2007

Paper Money History: The Bank of England is Born

The Bank of England is Born

Remember that the Goldsmiths of London created new paper money based on public trust: the economic situation in England around that time was in dire straits, there was no money and a battle needed this in order to carry on, the solution was the creation of the Bank of England, which came into being in 1694.

A Scotsman William Paterson proposed a loan of £1.2 million for the government, the principal was never to be repaid, the government was to pay a 8% interest and £4,000 management fee for the banks servicing the loan. Only £750,000 was actually deposited in the bank at the inception, so in actual fact they did not have £1.2million pounds to give the government. The Goldsmiths' system of banking had therefore been taken to a higher level, the huge deficit was made up by Fractional Reserve Banking. This is how the world banks run the modern banking system. I'm not that good with figures but what it means in brief is that more money is loaned out than the actual reserves in the banks vaults. Remember that the beauty of the notes issued by the Goldsmiths of London was that the public had full confidence in them even though they did not hold the actual gold values for which they were issuing promissory notes. The public did not know this and did not need to, as long as they were able to manage the accounts and deposits without any non-payment incidences. The Bank of England was doing the same thing only that it took place on a much bigger level. Therefore in world economics the concept of inflation was born, and with it one of the major concerns of the central banks of countries,which is what the Bank of England is to Britain; figuring out ways of controlling the ensuing inflation.

So with the creation of the Bank of England we find both the modern uses of paper money and the modern banking system taking shape.

1 comment:

SingingMamaDee said...

Nice looking blog which I just bookmarked! I just dugg the article, too, for insightful writing, research, and use of inductive research. I'm looking forward to learning more about collecting paper money.