Chapter 4: Bank Money and Instability: From Bagehot’s Principle to Financial Regulation
4.1 INTRODUCTION One of the guiding principles of the English model was that an issuing institution, whether operating as a monopoly or not, should behave like any other bank, freely seeking maximum profit, as long as it respected the legal limit on the quantity of banknotes issued. Sir Robert Peel, presenting the bill that would later become the Bank Charter Act of 1844, had explicitly exhorted the Bank of England to only serve the interests of profit, while the law would safeguard public interest. The reason for separating the Bank of England’s note issue and banking departments was to protect paper currency from the operations that the banking department would legitimately undertake, not in the public interest but solely in that of its own shareholders, in competition with the other banking houses in the English market. The various versions of the English model all observed this guiding principle, despite many differences of other kinds. Indeed, in some cases, such as that of the Second Bank of the United States, it was precisely the overly paternalistic attitude of the main note-issuing institution towards the rest of the banking system that tipped the political balance in favour of a system of regulated competition. However, the aim of reconciling public and private interests, enshrined in the 1844 law and in all other legislation it inspired, was not achieved in practice. The mechanism could have worked if the needs of the economy had not called for a steady increase in the money supply. Such...
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