David Rule and Iain de Weymarn

Technologies such as distributed ledgers create the possibility of new forms of digital money, whether privately-issued ‘stable coins’, tokenised commercial bank deposits, or central bank digital currencies. Authorities are considering a world where digital money circulates alongside existing forms of money. In the past, the nature of money has often changed. Prior to the late-seventeenth century, English money comprised predominantly silver coin and in the subsequent two centuries mainly gold coin, before evolving to include paper banknotes and bank accounts linked to card, internet and app-based payment systems.  But what can a previous period when money changed – 1695–97, when paper money first began to circulate alongside coin – tell us about the possible transition to digital money? 

We attempt an answer, including by drawing on the rich ‘Journals’ of a merchant Thomas Sandes, which are preserved in the Bank’s archives (‘Journals of Thomas Sandes’, 1693–1703, Bank of England archive (20A67/6/5-6)).

The monetary crisis of the 1690s

By the 1690s, England’s silver coin was already in short supply, with transactions widely settled using credit. William III’s war with France meant England was sending large sums of silver to the Low Countries to finance his armies. The ultimate source of this silver was predominantly illegal clipping of coins, shaving their edges to melt down. By 1695, older silver coins in circulation were typically less than half of their original size due to clipping and new coins, with milled edges that made them more difficult to clip, were largely hoarded. This was unsustainable and the government ordered a recoinage in 1696, replacing the old silver coins with newly minted ones. Unfortunately, this further reduced the overall value of coins in circulation (Table A). The monetary squeeze was potentially disastrous for an economy already suffering from poor harvests, war-related disruption to trade and higher wartime taxes. The Bank of England’s directors reported to the General Court in August 1696 that ‘the present want of specie at this time is the common calamity of the whole nation’.  Adoption of paper money, particularly by merchants for larger transactions, was critical in ensuring that the overall money supply did not shrink and plausibly increased in 1697 (Table A).

Table A:  Estimates of English money 1695–97 (£ millions)

Year Bank of England notes and bills in circulation outside the Bank Exchequer bills Coin in circulation outside the Bank of England Total
1695 Not available None 12.3 12.3
1696 2.0 Small 10.1 12.1
1697 1.9 2.7 8.9 13.5

Sources: on coin and Bank of England notes and bills: A millennium of macroeconomic data for the UK. on Exchequer bills: Aaron Graham (2019), ‘Credit, Confidence and the circulation of Exchequer bills in the early financial revolution’, ‘Financial History Review’. The Bank published its first balance sheet in March 1696 and earlier data on notes in circulation are unavailable.

The Bank of England had been created by the government in 1694, primarily for fiscal purposes. But from the beginning it also issued paper bills and notes that were used by merchants as money. For example, Thomas Sandes used its bills and notes from April 1695 to pay a wide range of creditors, including cloth merchants, ships chandlers and soap manufacturers. 

Bank of England notes and bills were not sponsored by the government as money, however. For example, it did not accept them for tax payments nor did it use them to pay its own creditors. Instead, in 1696, the government launched Exchequer bills as an alternative paper currency. Initially this was unsuccessful. Against a background of war and doubts about public credit, the 5% interest rate was insufficient and the bills immediately traded at large discounts in secondary markets. Only £160,000 of a planned £1.5 million was issued. In April 1697 Chancellor of the Exchequer Charles Montagu tried again. But this time he launched a comprehensive programme of measures to promote their use as money. A new Act authorised higher rates of interest on £1.5 million of bills. They became the first paper money accepted for payment of tax. Most importantly, the Treasury raised a subscription fund of £400,000 in silver from wealthy private investors, with one quarter (£100,000) paid upfront, to guarantee convertibility into silver. Subscribers were paid 10% per annum on the fund, even the unpaid three quarters. Montagu persuaded the East India Company to be an anchor investor. It agreed on the condition that the bills could be used to pay customs. The bills were fed into the market gradually, including a further £1.2 million in July. Although they initially traded at small discounts to face value, by autumn 1697 they were in wide circulation as money, buoyed by the Peace of Ryswick with France in September.

Thomas Sandes first purchased Exchequer Bills in June 1697, apparently speculatively through a broker at a discount to face value of 4%. By the end of 1697, however, he was routinely using them to make and receive payments. Key for Sandes was the ability to use them to pay customs, giving him an outlet for bills received from his creditors. He also received payment from the government in Exchequer bills: for example, for the hire of one of his ships to the navy as a man of war.

Possible lessons for the adoption of digital currencies

Can we learn anything from the switch from coin to paper in the 1690s that might be relevant to any adoption of digital currencies today? One lesson is that shortages of money are a powerful force in stimulating new forms of money to emerge. In the 1690s the extreme shortage of silver created a compelling reason for merchants to adopt new paper currency.  Arguably, this is a force driving some new forms of digital money to emerge – conventional forms of money being incompatible, or lacking the functionality to use, in some digital settings, creating an effective shortage. For example, conventional forms of money may be technically incompatible with transacting via distributed, rather than centralised, ledgers or when people commit to conditional transactions through programming.

Second, it is possible for different variants of the same new form of money to circulate simultaneously, perhaps with varying features appealing to different users. Thomas Sandes used Bank of England notes and bills and Exchequer bills interchangeably. A modern parallel might be that a variety of forms of digital money emerge alongside one another – perhaps in the forms of stablecoins, tokenised bank deposits and central bank digital currencies. 

A third lesson is that, unless appropriately designed, not everyone will have confidence in the new forms of money. For example, Thomas Sandes wrote in his ‘Journal’ in August 1696 that Edward and John Pinfold, cloth merchants, were ‘refusing to take banc bills or notes, otherwise I had paid him the balance of his account’. It is for this reason, for example, that the Bank of England’s proposals to ensure robust backing of systemic stablecoins with central bank deposits are important in order to underpin confidence and ensure wide acceptability. 

A fourth lesson is that sophisticated users, probably in wholesale markets, are likely to be early adopters of new forms of money. Merchants and financiers like Thomas Sandes were making large payments and had a practical need for large denomination paper notes.  Today some of the most active exploration of using tokenised forms of money by the private sector is taking place in wholesale settings. 

A fifth lesson is that government promotion of a new money can be beneficial but is not essential. Exchequer bills were ultimately a success in 1697 because the government put in place a detailed plan to support them, which included both financially attractive levels of remuneration and measures giving them a higher degree of practicality than other monies.  For example, some Exchequer bills (but not Bank of England notes and bills at this stage) were issued in convenient round denominations, such as £10 and £5, and the Government accepted them for payment of taxes and customs. In contrast, Bank of England bills and notes were also in circulation without strong government support. (The Government also initiated the next big expansion of paper currency in 1914 when it issued Treasury notes of £1 and 10 shillings. It wanted to encourage people to exchange gold coins for them in order to replenish its gold reserves following the panic at the start of the First World War.) 

Finally, and probably most importantly, new forms of money need to be credibly convertible into established forms of money at par. In the 1690s, this meant convertibility into silver.  Bank of England notes and bills had the backing of the Bank’s commitment to redeem them on demand, backed by its reserves of gold and silver. Exchequer bills needed the backing of the subscription fund, worth 27% of the value of bills issued, to make it credible that they could be redeemed in silver if needed.  A ‘Journal’ entry by Thomas Sandes indicates the importance to him of this commitment. On 18 January 1699, he wrote that he had bought Exchequer bills worth just over £2,000 ‘for which the mony lies riddy on demand’. In the same way, to be durably adopted, new forms of digital money will need to be credibly convertible into the established forms of money that we use today.

David Rule and Iain de Weymarn work in the Prudential Regulation Authority.

If you want to get in touch, please email us at bankunderground@bankofengland.co.uk or leave a comment below.

Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.


Leave a Reply

Your email address will not be published. Required fields are marked *