Thread by @litewhisperer

Interesting post the other day suggesting that the UK was constrained in its ability to spend due to fiduciary constraints.
This is a long thread, I will add an unroll link at the end.

Firstly to be clear, the UK does not have such a constraint.
However…

Between 1844 and 1925 a law was passed that Walter Bagehot in his 1873 book “Lombard Street: A Description of the Money Market” talked of a Government that confused ‘money’ with ‘currency,’ tying the BoE’s hands until crises forced flexibility.

That law was The Bank Charter Act (1844).
“the Issue of Promissory Notes of the Governor and Company of the Bank of England, payable on Demand, shall be separated and thenceforth kept wholly distinct from the General Banking Business”

It would seem that Government, enthralled by the pagan idolatry so common in the days of metallic fixed exchange rates was not familiar with the operations of a modern economy.
The act required that for every £1 of notes beyond the fiduciary limit, the BoE had to hold £1 of gold.

From The Weekly Balance Sheet of the Bank of England 1844-2006

The idea was to prevent inflationary over-issuance (a reaction to the 1825–1837 crises). But in 1847, 1857 & 1866 further economic panics occurred. Temporary suspensions of the Act allowed excess fiduciary issues to avert liquidity crises, then came World War I (1914–1918).

Priority one: - Gold standard suspended; fiduciary limit effectively abolished.
Notes backed by government debt, not gold. This system laid the groundwork for today’s fiat regimes.

Exchequer and Audit Departments Act 1866 provided the mechanisms needed to administer and oversee the exchequer.

Exchequer and Audit Departments Act 1921 came about as a result of the suspension of the gold standard and the collapse of the fiduciary limit.

It was an addition to, not a replacement for the 1866 act. It gave provision for a temporary overdraft facility, section 1 allowed Treasury to borrow from BoE to cover temporary deficiencies in the Consolidated Fund. BoE charged interest ad hoc.

Britain officially abandoned the gold standard on September 19, 1931, following a severe financial crisis and massive outflows of gold and capital.

The decision was prompted by a loss of confidence in the pound, triggered by a run on the Bank of England, which had been forced to use its gold reserves to meet demands for conversion, depleting its holdings.

The 1921 act was losing relevance but ran until The National Loans Act 1968 and its National Loans Fund, which serves as the primary mechanism for managing the UK government's financial business, including the issuance of government securities and the management of public debt.

The Ways and Means facility predates the Exchequer and Audit Departments Act 1921—it originated in the 18th century as an informal arrangement between the UK Treasury and the Bank of England (BoE). It remains today.

Updated, the Exchequer and Audit Departments Act 1866 and the National Loans Act 1968 remain, as always overdrafts and borrowing are accounting constructs, moving assets and liabilities between government departments.

@threadreaderapp please unroll