Restriction of Cash Payments by the Bank of England

Sykes considers the period of time in which England had issued an inconvertible paper currency, one which represented the value of a given amount of specie, but which the central bank would never be required to redeem.

There's some historical account of a critical period in English history where competition with other nations (namely France) caused a drain of gold from the state and at the same time a demand from the government to borrow more gold than the central bank had to lend. The solution to both was simply to suspend the redemption of notes for a time, which would stop the exportation of specie and give the government the ability to print money without the gold to back it.

The country took this suspension well, believing it to be temporary and maintaining confidence that at some unknown future date the suspension would be ended and the notes would again be redeemable. So long as merchants would accept the notes it trade, it was of little concern that they could not be redeemed.

Confidence at first remained high in the international markets, with the foreign banks maintaining the same faith in the eventually redemption of the notes. However, this confidence wanted over time and the value of the English pound slipped to the point that it was trading below par against foreign currencies. By 1801, the English pound traded at 14% below par in Hamburg, meaning that an English merchant had to pay that much more for goods purchased (or money borrowed) and pass that markup along to the domestic market.

Or seen another way, the English merchant could gain a substantial discount on imported goods by paying with gold instead of paper - but gold could not be had because it could not be obtained by redeeming notes and private individuals who held gold valued it more than paper.

A committee was formed to investigate the problem of the rising cost of gold (rather than admitting that the money was depreciating), and it came to the obvious conclusion: so long as paper money could not be redeemed, confidence in receiving its full value in future would continue to degrade, and the value of gold would continue to increase (which is to say the value of paper currency would continue to decline). Ultimately, the committee concluded that the patience of the people had been exceeded, and while they had tolerated the suspension of cash payments as a temporary measure, the suspension had been continued for too long.

The author details a series of events that enabled England to gain possession of gold and resume the payment of its notes, which quickly restored their value in both domestic and international markets. From that time to the time in which this book was written (1905), England has not had occasion to suspend payment of its currency - but he concedes that the possibility of another suspension is always present.