Fishguard and the Gold Standard

In its first century in operation, the Bank of England carried out a wide array of functions, many of which it had a legal or practical monopoly over. One of these was ensuring its banknotes, the most common in the country, were adequately backed by reserves, the most important of which was gold. However, in 1797, the threat of a French invasion of Britain prompted a run on the Bank of England that culminated in the suspension of the gold standard. What was originally intended to be a temporary measure designed to relieve the Bank of its short-term woes continued for almost twenty-five years. It was among the earliest experiments with a de-facto fiat money in a major country and among the longest lasting until the 20th century.

Bank of England

The Bank of England was the product of wartime finance, established in 1694 to raise a loan for the English government during the Nine Years’ War being fought by a coalition including England against France. In the subsequent decades, the bank grew quickly both in size and the scope of its operations. It served a fiscal purpose, managing government deposits and the state debt alongside making loans to the state. The Bank also discounted bills to provide funding to private merchants while issuing banknotes and exchanging those notes for coins and vice versa, all the while maintaining reserves of gold sufficient to back its issuances. In the 18th century, the Bank of England had the functions of a Treasury, a private commercial bank, and a central bank all combined.

The Bank was the dominant financial institution in London. Outside the capital, smaller ‘country banks’ issued their own notes but these were redeemable in either gold or Bank of England notes so their operations were dependent on the policies of the Bank. In either case, coins still made up the principal medium of exchange for ordinary people, especially outside London. A decade before convertibility was suspended in 1797, coins still made up the largest form of money in circulation, greatly exceeding the perhaps £11 million in Bank of England notes outstanding, itself already exceeding the reserves of gold at the Bank which summed to £8.5 million in 1790.

Battle of Fishguard

The state of the Bank was greatly affected by the French Revolution and the wars that followed. In 1793, Britain entered another growing coalition against France. After two years of war, French successes saw increased redemptions of notes for gold at the Bank of England, a symptom of an exchange rate that was too high. The banknotes were under pressure for reasons that were under government control and those outside it, but in either case they were outside the control of the Bank, then still technically a private institution.

First, some of the demand for redemptions were driven by poor performance during the war; the French saw many early victories. Applying further pressure on the Bank were the outflows of money as aid to coalition governments or to cover naval expenses abroad; similarly contributing to the outflows were rising imports of grain, accentuated by poor harvests in England, and imports of materials needed to fight the war. These imports caused foreign sellers of goods sold in Britain to redeem their notes for gold and export the metal back home. There were also shortages of bullion as people hoarded the precious metals in Britain.

After 1795, when the decline in the Bank’s gold reserves accelerated, the Bank responded by restricting the issuance of new notes. It set a daily cap on the bills it would discount thus limiting the production of new notes, a contractionary monetary measure. However, this reduction in the Bank’s balance sheet was limited by large loans to the government demanded by the Prime Minister, William Pitt the Younger. The extension of these loans limited the overall contraction in banknotes. So, while gold reserves had fallen from £6 million in 1795 to £2 million the following year, notes in circulation had fallen by a considerably smaller proportion, from £14 million to £9 million.

Already in this position of weakness, pressure on the Bank of England intensified in 1797 which got off to a rough start in Britain. On February 22, 1797, somewhere between 1,200 and 1,400 French soldiers successfully landed in Britain near the harbor town of Fishguard in Wales. The military situation itself was hardly dire; a larger French plan for invasion had fallen apart and the small force that did land surrendered two days later. However, the events set off a panic in other parts of the country.

The panic first took on a financial dimension in Newcastle of all places, almost as far away in England as possible, partly because an order from the government arrived in the area which set off fears of a larger invasion. Newcastle had been one of the larger French targets. Farmers in the hinterland sold their livestock at low prices in the city and sought to exchange their earnings for gold. Demand for gold filtered through the local country banks all the way to London, where it was keenly felt by an already overextended Bank of England. These events, combined with the news of Fishguard, fed the panic.

Bank Restriction Act

The invasion at Fishguard caused a run on the Bank as holders of banknotes sought to redeem their notes for gold. The Bank of England’s reserves dwindled and new supply would take days to import; it didn’t help that much of the Bank’s assets were tied up in private loans to the government, the public analogs to which were trading at very depressed levels. Prices of 3% consols, the most liquid government bonds of the day, fell to 51% of face value, for a yield of just under 6%. Gold reserves at the Bank fell to under £1.3 million and just as had been the trend in recent months, the Bank was unable to reduce its note liabilities by the same proportion, further exacerbating the ratio of notes to bullion.

Data from Norman J. Silberling’s “British Financial Experience 1790-1830.”

The Bank notified the Prime Minister of its woes and Pitt soon ordered the Bank to suspend convertibility into gold on the weekend of February 25 and 26; this was announced to the public the following Monday. Within five days of the failed invasion at Fishguard, the gold standard was suspended in Britain, at least with respect to Bank of England notes. Desiring to extend this suspension for a full year, Parliament passed the Bank Restriction Act of 1797 on May 3; in the end, the suspension lasted until 1821. The suspension of the gold standard in Britain was ordered by the government, at the request of the Bank, rather than by the Bank itself in order to preserve the reputation and apparent creditworthiness of the Bank.

“Of Augustus and Rome
The poets still warble
How he found it of brick
And left it of marble.
So of Pitt and of England
Men may say without vapour
How he found it of gold
And left it of paper.”
–Quip of unknown origin

Additional provisions in the legislation included the acceptance of banknotes at face value for the payment of taxes, regardless of their actual value, helping ease the transition to a fiat currency. Later legislation allowed the Bank of England, and select other banks, to print lower denomination notes as metal coins increasingly vanished from circulation. Until 1795, the Bank had never issued notes of under £10. Later, all bankers were permitted to issue notes of under 20 shillings.

Results

On the same day as the suspension was announced to the public, three thousand businessmen meeting at the residence of the Lord Mayor of London pledged to accept banknotes no differently than they would metal coins. Following the news, Bank of England notes fell in value for a few days before recovering. Thereafter, the Bank began to increase its banknote issuance once more as notes increasingly displaced coins in circulation.

Although the printing of notes increased, it must be noted that this partially made up for a previous contraction. Further, the government did not abuse the Bank’s printing press. Among the provisions of the Bank Restriction Act were limits on the ability of the Bank to finance the government. Frequent requests for large loans were seen as helping accentuate the Bank’s woes to begin with.

In the end, the pound survived the Battle of Fishguard and the suspension of the gold standard. The banknote pound only fell 30% over the nearly twenty-year period from 1797 and 1815 as the money supply grew but at a controlled pace. Bank of England notes outstanding grew from £10 million in 1796 to £15 million in 1800 and then more slowly to a peak of almost £27 million in 1815, the year that saw the end of the Napoleonic Wars. The final years of the ‘Restriction period’ as it became known actually saw declining volumes of currency outstanding. Some attribute the controlled transition to a fiat currency in Britain to the fact that the measures were intended from the start to be merely temporary. Nonetheless, it is admirable that the urge to monetize government deficits was suppressed, if it even existed. By 1815, British government debt stood at £845 million, compared to £388 million in 1796 and £263 million when the wars began in 1793.

Lesson

Among the remarkable facts of the suspension of convertibility in Britain in 1797 was how seamless the unprecedented move was. Much of the memory of the event is of the political consequences of the suspension and not any negative economic or financial effects. The pound held up reasonably well and Bank of England notes came to be more widely utilized instead of ever scarcer metal coins. All this was the result, at least in an immediate sense, of a failed French invasion in those bellicose times. Though the wars continued for almost a further twenty years, when the fighting did end, Britain was in a position to transition back to gold, partly because of the relative success of the Restriction period.

More from the Tontine Coffee-House

Read more about the Bank of England, including how it was founded and the weathervane that used to guide its monetary policy decisions. Along the way, discover how the Bank reacted to one of the 19th century’s biggest financial panics.