volume 15, issue 3
(2019)

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Desan: So it's created money without using silver or gold. And the striking thing here is it's not clear the British understood exactly what they were doing. People had theorized different bits and pieces of it. What's not clear is they realized that, if they set up such a system, nobody really needed to cash the bank notes. Because the bank notes held as much value as the government would give for them. As long as the government was taxing and was a serious viable government and people had to pay their taxes in something, they might as well pay them in paper, as in silver. There was no need to go to the bank to cash the money. So it's an amazing moment where we see this innovation, which is de facto the government creating credit money out of paper through the intermediary of a group of investors in a way that will liberate the government to spend much more paper into circulation than the amount of silver coin that is in existence.

The other thing that's striking about this moment is that there's no reason you actually need the investors in the middle of the relationship between the government and its taxpayers and citizens. In fact, at the same time that the government is borrowing from the Bank of England, it's also experimenting with direct issue bills, where it spends English money into circulation and taxes it back. Both of these things, whether you spend the government's promises into circulation and tax them back, or you spend the banks promises into circulation and tax them back, the government's basically supporting and creating money that depends on its own credit loop. But the system that takes off, for many different reasons, is the bank structured system, perhaps in part because the government finds it useful to assimilate and channel the legitimacy of the investors who nevertheless are holding a silver reserve.

And perhaps because the investors are a politically powerful group who find this to be a really lucrative profit making opportunity. So the English, basically over the 18th century, start developing this relationship with this group of investors who are the Bank of England. The Bank of England is the first really robust national bank that issues what becomes the everyday currency. It takes a long time. At first, there are only large denomination bills, but over time the Bank of England will be issuing the money that becomes the English paper sterling. And there are many governance changes we could talk about that are wrapped up in this innovation. The government is, for example, for the first time delegating its public power—its sovereign monopoly over money creation—to investors who will make decisions about when to issue money.

Those investors will also have the incentive to police taxation. So they'll be pressing the government to tax in a disciplined way in order to get repaid. It's the bank investors now who will profit from this funding technique that allows them to issue many paper promises on a much smaller silver reserve. So what we've done is seen how the government, working with wealthy investors, has created an intermediary, a set of creditors who will now intermediate the relationship between the government and taxpayers.

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Christine Desan is Leo Goettlieb professor of law at Harvard Law School, and author of Making Money: Coin, Currency, and the Coming of Capitalism (Oxford UP, 2015).