The Mystery of Banking

188
The Mystery of Banking
Chapter Twelve.qxp 8/4/2008 11:38 AM Page 188

---

The Origins of Central Banking
189
The 1847, 1857 and 1866 crises showed the Government
always ready, on the only occasions when it was necessary,
to exempt the Bank from the provisions of the Bank Act
(Peel’s Act), and the opinion was necessarily expressed in
some quarters that the clause of the Act, limiting the fiduci-
ary issue of the Bank, was a mere paper provision having no
practical application, since the Bank of England could
always rely on the Government to legalise a breach of it
every time it got into a difficult position. The relations
between the Bank and the Government were, in fact, a tra-
dition too long established for either the Bank, or the pub-
lic, or the Government, to envisage anything other than full
Government support to the Bank in time of stress. It had
always been a privileged and protected institution.
13
If the political flaw of trusting a monopoly Bank of England
combined with the economic flaw of overlooking deposits to
make the English banking system worse than before, the effect on
Scotland was far worse. For the Currency School theorists were
totally ignorant of the beneficial workings of the Scottish free
banking system, and in their haste to impose a uniform monetary
scheme on the entire United Kingdom, they proceeded to destroy
Scottish free banking as well. 
Peel’s Act to Regulate the Issue of Bank Notes was imposed on
Scotland in July 1845. No new banks of issue were allowed in
Scotland any longer; and the note issue of each existing bank
could only increase if backed 100 percent by specie in the bank’s
vault. In effect, then, the Scottish banks were prevented from fur-
ther note issue (though not absolutely so as in the case of Eng-
land), and they, too, shifted to deposits and were brought under
the Bank of England’s note issue suzerainty. 
One interesting point is the lack of any protests by the Scot-
tish banks at this abrogation of their prerogatives. The reason is
13
Smith, 
Rationale of Central Banking
, pp. 18–19.
Chapter Twelve.qxp 8/4/2008 11:38 AM Page 189

---

190
The Mystery of Banking
14
As White says, 
The bankers of Scotland did not protest loudly against the
Act of 1845, as it bestowed upon them a shared legal monop-
oly of the note-issue. . . . Peel in essence bought the support
of all the existing Scottish banks by suppressing new
entrants. In freezing the authorized issues at 1844 levels, the
Act of 1845 also hampered rivalry for market shares among
existing banks. (“Free Banking,” p. 34)
that Peel’s 1845 Act suppressed all new entrants into Scottish
note banking, thereby cartelizing the Scottish banking system,
and winning the applause of the existing banks who would no
longer have to battle new competitors for market shares.
14
Chapter Twelve.qxp 8/4/2008 11:38 AM Page 190

---

XIII.
C
ENTRAL
B
ANKING IN THE
U
NITED
S
TATES
I: T
HE
O
RIGINS
1. T
HE
B
ANK OF
N
ORTH
A
MERICA AND THE
F
IRST
B
ANK
OF THE
U
NITED
S
TATES
T
he first commercial bank in the United States was also
designed to be the first central bank.
1
The charter of the
Bank of North America was driven through the Continen-
tal Congress by Robert Morris in the spring of 1781. Morris, a
wealthy Philadelphia merchant and Congressman, had assumed
virtually total economic and financial power during the Revolu-
tionary War. As a war contractor, Morris siphoned off millions
from the public treasury into contracts to his own mercantile and
shipping firm and to those of his associates. Morris was also
leader of the powerful Nationalist forces in the embattled new
191
1
There were very few privately-owned banks in colonial America, and
they were short-lived.
Chapter Thirteen.qxp 8/4/2008 11:38 AM Page 191

---

country whose aim was to reimpose in the new United States a
system of mercantilism and big government similar to that in
Great Britain, against which the colonists had rebelled. The object
was to have a strong central government, particularly a strong
president or king as chief executive, built up by high taxes and
heavy public debt. The strong central government was to impose
high tariffs to subsidize domestic manufacturers, develop a big
navy to open up and subsidize foreign markets for American
exports, and launch a massive system of internal public works. In
short, the United States was to have a British system without
Great Britain.