What Is the Bank Restriction Act of 1797
The Bank Restriction Act of 1797 was an act passed by the British government to restrict the Bank of England from converting bank notes into gold. The act was passed in order to allow Parliament to print money to finance war with France.
Understanding the Bank Restriction Act of 1797
In 1694, the Bank of England, a private corporation, was created out of the British government's need for cheap loans to finance its expenses. Three years later, the Bank was given monopoly rights that covered banking and note-issuing activities. However, once the war with France began in the 1790s, the British government's military expenses rose very quickly. Thus, the government issued paper notes that the Bank of England was expected to convert into gold on demand. But, by 1797, the Bank's gold reserves had been reduced to dangerously low levels as a result of heavy demands for gold redemptions from both domestic and foreign note holders. To save the Bank from bankruptcy, the British government passed the Bank Restriction Act of 1797.
By the end of the war in 1814, the amount of currency in circulation was far larger than the amount of gold backing it, leading to a sharp depreciation in the value of British currency, the pound sterling. Convertibility to gold was restored in 1821 to stabilize the currency. By then, the amount of gold backing the currency had grown substantially and amounted to much more than the value of the pounds in circulation.