Phase I ('pre-accommodation'): Bank notes as private credit money form developed throughout 18th century Britain. Main suppliers were the Bank of England (founded in 1694) and country banks, which developed from 1750 onwards. During the ensuing first wave of the Industrial Revolution, the number of country banks as increased sharply and the volume of circulating country bank notes expanded massively. Country banks were the “shadow banks” of the age.
Phase II ('accommodation'): The accommodation occurred after the outbreak of the French Revolutionary War in 1792, which was associated with the financial crises of 1793 and 1797. In February 1797, as a reaction to the depletion of the Bank of England’s bullion reserve, the government—via an Order of the Privy Council and later backed by Parliament with the Bank Restriction Act—initiated the ‘Restriction Period’ by suspending cash payments and thus decoupling Bank of England notes from their gold base. The Restriction turned Bank of England notes into private-public money: A liquidity backstop was established via the legal proclamation that Bank of England notes were a promise to pay nothing else but themselves—they were turned into an ultimate means of payment; and a solvency backstop was created by the government’s guarantee to accept an unlimited amount of Bank of England notes for tax payments.
After the accommodation, various parliamentary committees analyzed and debated the status of bank notes, and tried to come to grips with that credit money form. The regulatory process took until the Bank Charter Act of 1844 which turned bank notes into pure public money. The Act re-defined bank notes as mere gold certificates and made their issue based on government law. Private note issue by country banks was prohibited, the Bank of England was split up into a Banking and an Issue Department. While the Banking Department continued with its classical banking operations and kept up its activity of private credit money creation in the form of bank deposits, the Issue Department became effectively a government agency with a nation-wide monopoly of bank note issuance. Accordingly, new tools for governing the bank note supply were invented. The role of bank notes as credit money under government control successively spilled over to other states in Europe and North America.
Accommodation of bank notes in 1797: Prime Minister William Pitt attacks the Bank of England (the Old Lady of Threadneedle Street), Image: wikipedia.org