The Bank Charter Act of 1844

The Bank Charter Act sought to govern and restrict the issue of bank notes that were convertible into gold on demand, which was enacted in response to "very general dissatisfaction in financial circles" as well as a few commercial crises that threatened the stability of the Bank of England.

The ultraconservative viewpoint (called "The Currency Theory") maintained that banks should be limited to issuing notes that they could immediately redeem based on the specie in their vaults, as opposed to the banking theory which maintained that banks can manage their reserves to meet the demand for redemption without having to have the full amount to back all notes if they were redeemed at once. There are benefits and drawbacks to either approach, and naturally those who subscribed to one theory remained firmly entrenched against the other.

The author enumerates the main provisions of the act, the pith of which is to divide the B of E into two departments, Issue and Bank, with there being more stringent controls on the Issue department (which would issue notes against existing stock) than on the Bank department (which would issue bills of credit on future receipts). This essentially accommodated both currency and banking theory, which appeased some and irritated others, so debate continued as to whether the Act was the salvation or damnation of English banking.

In time, it was found that the Act was largely pointless. It failed to prevent financial crises and it also failed to ensure the convertibility of notes to specie. While its intention was to separate the bank's stock of specie and earmark it for different purposes, it is inevitable that the two would interact to ensure one another because the bank cannot half-fail or be held half-responsible for its liabilities. That is, all the bank's assets must cover all the bank's liabilities regardless of how they are attributed to various accounts in the ledgers.

At the same time, it must be remembered that "pointless" is not "harmful" and the shortcomings of the act did no harm, and were not even apparent under most circumstances. The most negative consequence was a diminution of the bank's ability to issue credit, which affected it as an organization but did not have a significant effect on the market for credit from all sources.