In 1745, Charles Edward Stuart (“Bonnie Prince Charlie”) had raised an army in Scotland while most of the British Army was on the Continent and was marching south. By the time it reached Derby, the merchants of London were in a panic. They met at their usual coffee house, Garroways, and were on the point of going to the Bank of England to draw their money out — that is, gold coins — but were persuaded to accept £5 notes instead because the bank didn’t have enough gold. This was the first time, since it was founded in 1694, that the Bank of England stopped acting as a bank — albeit a privileged one — and became a lender of last resort.
Thenceforth it was no longer a real bank but only a lender of last resort. This meant that all the ordinary high street banks needn’t worry overmuch about not having sufficient reserves of gold in their vaults because they could always go to the ‘Bank of England’ to be rescued whenever there was a panic.
The irony is that since basic rates in all advanced countries (except China) are zero, the Bank of England, the US Fed and other central banks can’t even act as lenders of last resort because they have no money. They have some gold, of course — it has always remained precious to central banks whatever they say about to Joe Public about it — but this would be nowhere near sufficient in a economic recession. All they have are governmental debts which they hope the government will pay back one day.
So, today, the central banks of the advanced countries are neither banks nor lenders of last resort. They can’t even carry out any more Quantitative Easing. It’s interesting, is it not, that the world trading system continues? It’s very shaky, of course, because of past governmental monetary interferences, but if government can keep their hands away from the printing presses there’s a very real chance that the economic system will correct itself in due course.
