Bank of England suspends gold convertibility
On February 26, 1797, in response to rumors of a French invasion of Britain and a run on the Bank of England's gold reserves, the Privy Council ordered the Bank to suspend gold convertibility of its notes. The suspension was supposed to be temporary — a wartime emergency. It lasted for 24 years, through the entire Napoleonic Wars, and was only ended by Robert Peel's Bank Charter Act of 1821. During the suspension, the Bank of England note traded at a discount of up to 30 percent against gold bullion. It was the first time a major European central bank had effectively admitted that its paper was not fully backed — and the template for every subsequent wartime suspension.
The Bullion Committee report of 1810, investigating the suspension, contains some of the first rigorous economic analysis of what we would now call fiat currency — the argument between David Ricardo and the Bank's directors about whether the note depreciation was 'monetary' (too many notes issued) or 'real' (war conditions) essentially established the methodological disagreement that still divides modern macroeconomics.
03 · First Paper Bubbles
The invention of paper money in Western economies (borrowed conceptually from Song Dynasty China) introduced a new debasement mechanism: issuing more paper claims on gold or silver than the issuer actually held. The first Western paper monies were issued by the Massachusetts Bay Colony in 1690. Within 30 years, John Law's Banque Royale in France had demonstrated the catastrophic potential at industrial scale. Every paper-money experiment of the 18th century — Continentals, assignats, Bank of England wartime notes — followed the same pattern: issue, over-issue, collapse.
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