About the Work
“Plan for the Establishment of a National Bank” is a posthumously published economic treatise by David Ricardo, the influential British political economist. The work presents a detailed proposal for reforming the British monetary system by transferring the privilege of issuing paper currency from the Bank of England to the State, operating through a body of independent Commissioners. The text was discovered among Ricardo’s papers after his death, having been completed by him before his final illness. It was published with an editorial preface explaining its origins and the circumstances of its discovery. The work combines theoretical argumentation with a practical, numbered regulatory scheme, making it both a polemical essay and a legislative blueprint. The book is relatively brief but dense with economic reasoning, addressing objections to the plan, comparing the proposed system with the existing arrangement, and providing sixteen specific regulations for implementation.
Context
The work emerges from the early nineteenth-century debates over British monetary policy, particularly following the suspension of cash payments by the Bank of England in 1797. During the Napoleonic Wars, the Bank had been compelled to stop redeeming its notes in gold coin, leading to a period of inconvertible paper currency and significant inflation. Ricardo had previously engaged with these issues in his writings on political economy, and this plan represents his practical proposal for restructuring the nation’s currency system. The preface notes that Ricardo intended to publish the scheme after the last Session of Parliament, indicating its timeliness in contemporary political discussions. The text reflects ongoing concerns about the relationship between the Government, the Bank of England, and the broader economy, as well as debates over the proper management of paper currency and the prevention of its abuse. The plan also responds to the renewal of the Bank’s charter, which was due to expire in 1833, making the question of the Bank’s privileges and responsibilities a matter of immediate legislative concern. The work thus sits within a larger body of early nineteenth-century economic writing that sought to establish sound principles for currency management and to limit the dangers of both inflation and government fiscal irresponsibility.
Structure of the Book
The book is organized into three main sections following an editorial preface. The first section presents the core argument for transferring the issuance of paper money from the Bank of England to the State, examining the Bank’s two distinct operations, the nature of Government debt to the Bank, and the potential consequences of dissolving the Bank as a joint stock company. This section also addresses the significance of Bank accommodation to merchants, drawing on evidence from parliamentary inquiries. The second section confronts the principal objection to the plan—that Government cannot be trusted with issuing paper money—and proposes the Commissioner solution, followed by a detailed enumeration of sixteen regulations for implementing the scheme. The third section provides commentary on these regulations, explaining their operation, addressing practical concerns, and calculating the estimated savings to the nation. The structure thus moves from theoretical argument to practical proposal to detailed explication, with the sixteen regulations serving as the centerpiece of the work.
Detailed Section-by-Section Summary
Preface and Editorial Context
The preface explains that Ricardo intended, after the last Session of Parliament, to write a scheme for publication that would give the public the profit from Paper Currency without reducing security against its inconveniences. He completed this design before his last illness, and the pages were found among his papers after his death. It is not known whether he thought alterations were necessary, except on one point: after communicating his manuscript to a family member, it was suggested that difficulty might arise because notes of one district were not payable in another, which would hinder travel. Ricardo admitted that something might be needed to obviate this but thought a simple arrangement would suffice. He did not commit any expedient to writing, and his friends decided to publish the manuscript precisely as found, with this explanation.
The Bank’s Two Operations
The main text begins by observing that the Bank of England performs two distinct banking operations with no necessary connection: it issues paper currency as a substitute for metallic currency, and it advances money as loans to merchants. Ricardo argues that these operations could be carried on by two separate bodies without loss of advantage to the country or to merchants. This distinction is fundamental to his proposal, as it allows him to argue that the Bank’s lending functions need not be tied to its currency-issuing functions.
Proposal for State Issuance
Ricardo proposes that the privilege of issuing paper money be taken from the Bank and exercised by the State only, subject to the same regulation of paying notes on demand in specie. He argues that national wealth would not be impaired by this change. The country would still use cheap paper money instead of dear metallic money, securing the advantage of making national capital productive—as raw material, food, clothing, machinery—instead of retaining it useless as metal. This argument rests on the classical economic principle that resources devoted to unproductive uses, such as metallic currency, represent a loss to the nation’s productive capacity.
Government Debt and Interest
Ricardo notes that the public, or Government, is indebted to the Bank for more than the whole amount of bank notes in circulation. The Government owes the Bank fifteen millions—its original capital, lent at three per cent interest—plus many more millions advanced on Exchequer bills, half-pay and pension annuities, and other securities. If the Government were the sole issuer, the only difference would be regarding interest: the Bank would no longer receive it, and the Government would no longer pay it. Other classes would be in the same position. There would be just as much money in circulation—whether the sixteen millions of paper money circulating in London were issued by Government or a banking corporation makes no difference. Merchants would suffer no inconvenience in getting advances, because the amount of advances depends on the amount of money in circulation, which would be the same, and the Bank would have the same proportion to lend.
The Bank’s Other Funds
Ricardo claims to have proved that the Bank’s advances to Government exceed the whole amount of its notes in circulation. Therefore, part of its advances to Government and all its loans to others must come from other funds the Bank possesses. These funds would remain after Government discharged its debt and all notes were withdrawn. He argues that the Bank Charter should not be renewed for issuing paper money on the grounds that merchants would lose borrowing facilities, as their means of borrowing would be just as ample.
Potential Dissolution of the Bank
If the Bank were deprived of issuing paper money, it might have no motive to continue as a joint stock company and might dissolve. Ricardo believes it would still have profitable means of employing its funds. Even if dissolved, commerce would suffer no inconvenience. Whether the joint stock is managed by directors or divided among proprietors makes no difference in real amount or efficacy. It would likely be collected in masses and managed with more economy and skill than by the Bank.
Insignificance of Bank Accommodation
Ricardo argues that too much stress is laid on the benefits of Bank accommodation to merchants, believing it insignificant compared to private funds. Currently, the Bank’s advances to merchants on discount are trifling and have never been great. The Bank’s fund for the last thirty years consisted of its capital, savings, and deposits from Government and individuals. From this must be deducted cash and bullion in its coffers, advances to holders of receipts for loans, and advances to Government. The remainder devoted to commercial objects would be comparatively small.
Evidence from 1797
From papers laid before Parliament in 1797, the Bank gave a scale of discounts. An individual calculated that money advanced by discount to merchants for three and a half years previous to 1797 varied from two millions to 3,700,000 pounds. These are trifling amounts compared to sums lent by individuals. In 1797, the Bank’s advances to Government alone, exclusive of its capital, were more than three times the advances to all merchants.
Mr. Richardson’s Evidence
A committee of the House of Commons inquired into the law of pledges and consignors and consignees. It called Mr. Richardson of Richardson, Overend, and Company, eminent discount brokers. Asked if he discounted bills on the security of goods, he answered “Very large.” Asked if he carried on business much beyond any other individual, he said “very much beyond.” Asked if to the extent of some millions annually, he answered “about twenty millions annually;—sometimes more.”
Conclusion on Private Discounting
Ricardo says Richardson’s evidence proves the extent of transactions in which the Bank has no concern. If the Bank broke up and divided its funds, Richardson’s business would increase, as more would apply for money and more would seek employment for it. The same amount of money would be employed; if not by the Bank, it would find its way directly or circuitously to Richardson or another money agent, as no other way would be so productive.
Final Summary of the First Section
If Ricardo’s view is correct, commerce would not be impeded by depriving the Bank of England of issuing paper money, provided Government issued an equal amount. The sole effect would be a transfer of the profits of circulation from the Bank to the public.
The Objection of Government Abuse
The second section opens by addressing a final objection to the proposed plan: that Government cannot be safely entrusted with issuing paper money, as it would likely abuse this power. The specific fear is that during wartime financial pressure, Government would cease paying coin on demand for its notes, creating a forced government paper currency.
The Commissioner Solution
Ricardo concedes this danger would be real if ministers themselves controlled issuance. However, he proposes placing this trust in Commissioners who cannot be removed from office except by a vote of one or both Houses of Parliament. He further proposes preventing all intercourse between Commissioners and ministers by forbidding every species of money transaction between them. Commissioners should never lend money to Government on any pretext, nor be under its control or influence.
Comparison with Bank Directors
Ricardo argues that ministers would have much less power over such independent Commissioners than they currently possess over Bank Directors. Experience shows the Bank Directors have been unable to withstand ministerial cajolings, frequently increasing advances on Exchequer bills and Treasury bills even while declaring such actions risked the stability of their establishment and the public interest.
The 1797 Correspondence
The passage references correspondence between Government and the Bank prior to the stoppage of Bank payments in 1797. The Bank attributed the necessity of that measure to frequent and urgent Government demands for increased advances—an attribution Ricardo considers erroneous in this instance.
The Author’s Question
Ricardo asks whether the country would possess greater security against influence over paper issuers if paper money were issued by Commissioners on his plan rather than by the Bank of England as presently constituted. If Government wanted money, it should raise it legitimately—by taxing the people, issuing and selling exchequer bills, funded loans, or borrowing from the numerous banks that might exist—but in no case should it borrow from those who have the power of creating money.
Surplus Management
If the Commissioners’ funds became so ample as to leave a surplus, they should go into the market and publicly purchase government securities. If they needed to contract their issues without diminishing their gold stock, they should sell securities in the open market. This involves a trifling sacrifice—the turn of the market—which is not worth considering given the importance of the question. Competition in this business has reduced the turn to a very small fraction, and transactions would never be great since circulation would be kept at its just level by allowing small contraction or extension of treasure in coin and bullion. Only when the country’s increasing wealth required permanently increased circulation would it be expedient to invest in interest-paying securities.
The Benefit
The most complete security could be obtained against Government influence over a National Bank’s issues, and all interest now annually paid by Government to the Bank would become part of the national resources.
The Sixteen Regulations
The passage then presents a detailed plan with sixteen numbered regulations. The first regulation appoints five Commissioners with exclusive power to issue all paper money. The second provides that upon expiration of the Bank of England’s charter in 1833, Commissioners shall issue fifteen millions of paper money—the amount of the Bank’s capital lent to government—discharging that debt, with the annual 3 percent interest ceasing. The third regulation directs that ten millions of paper money shall be employed to purchase gold bullion from the Bank or others, and to redeem government debt on exchequer bills within six months. The fourth requires the Bank to redeem all its notes in circulation with new government notes, keeping a reserve of new notes equal to its own notes in circulation. The fifth provides that Bank of England notes shall be current for six months after charter expiration, then no longer received by government in revenue payment. The seventh regulation directs that country bank notes shall cease circulating within six months, with those banks obliged to pay them in government notes or gold coin. The eighth provides that agents in different towns shall verify note genuineness by affixing signatures, after which notes are exchangeable only in their district. The ninth states that notes signed in one district are not payable in others, but bills may be obtained on other districts. The tenth provides that country notes are not payable in coin in the country, but bills on London may be obtained, paid in coin or London notes. The eleventh directs that depositing coin or London notes in the London office yields bills payable in other districts’ notes, and depositing coin yields London notes. The twelfth requires Commissioners to buy gold of standard fineness exceeding one hundred ounces at not less than £3:17s.6d. per ounce. The thirteenth requires Commissioners to pay notes and bills on demand in gold coin. The fourteenth provides that one-pound notes shall be issued, given in exchange for larger notes if preferred, this regulation lasting one year for London but permanent in country districts. The fifteenth states that country agents will neither give notes for coin nor coin for notes. The sixteenth directs Commissioners to act as general banker to all public departments as the Bank of England now acts, but precluded from serving any corporation or individual.
Commentary on Regulations
Ricardo comments that Commissioners should be five in number, adequately salaried, appointed by government but not removable by it. The second regulation would issue twenty-five millions of paper money, which may not be too large for the whole country’s circulation; if excessive, the excess may be exchanged for gold coin or exchequer bills sold. Other substitution modes exist if the Bank co-operated. It might be desirable for Government to purchase the Bank’s buildings at fair valuation and take its clerks and servants into pay—just to the employees and useful to the public. Payment to the Bank for managing the national debt should wholly cease at charter expiration, with this department placed under Commissioners’ superintendence and control.
Third Regulation — Gold Deposit and Total Funds
The third regulation requires a proper deposit of gold coin and bullion, without which the new establishment could not operate. The Commissioners would actually have fourteen millions at their disposal rather than ten. This is because a subsequent regulation makes the Commissioners Banker to the public departments, and experience shows these departments keep on average four millions in their Banker’s hands. Thus the Commissioners would hold these four millions in addition to the ten million capital. If five millions were devoted to purchasing coin and bullion, nine millions would be invested in floating securities. If eight millions were invested in gold, six millions would remain for purchasing exchequer bills. Any debt still owed to the Bank after this second payment by the Commissioners must be provided for by loan or made subject to a special agreement between the Government and the Bank of England.
Fourth and Fifth Regulations — Substitution of Paper Money
These provide for replacing old paper money with new, and protect the Bank from paying specie on its outstanding notes. This causes no inconvenience to note-holders because the Bank must give them Government notes, which are exchangeable on demand for gold coin.
Seventh Regulation — Country Bank Notes
This provides for substituting new notes for old Country Bank notes. Country Banks could easily obtain new notes since all their transactions finally settle in London, and their circulation is raised upon securities deposited there. By selling these securities, they could obtain the money needed to pay their notes, so the country would never lack adequate circulation. Country Bank circulation is estimated at about ten millions.
Eighth Regulation — Fraud and Forgery
Initially, paper money cannot be issued from each district but must all be sent from London. Public agents should therefore be prepared in as many convenient places to verify note genuineness. After a time, each district’s circulation would use notes issued locally, in forms sent from London.
Ninth Regulation — Remittances
A man at York wishing to pay £1000 to someone at Canterbury could pay £1000 in York-issued notes to the York agent and receive a bill for £1000 payable at Canterbury in that district’s notes.
Tenth Regulation — Coin Payments
Notes of every district are payable in coin in London. A man in York wanting £1000 in coin should bear the expense of sending it himself; government should not pay. This sacrifice is necessary for paper money; if country inhabitants object, they may use gold instead, but must still bear procurement costs.
Eleventh Regulation
Like the ninth, this provides for remittances and payments throughout the country.
Twelfth Regulation — Limiting Paper Currency
The Commissioners must always issue paper in exchange for gold at £3 17s 6d per ounce. Regulating issues by gold price, they could never err. It might be expedient to oblige them to sell gold bullion at £3 17s 9d, in which case coin would probably never be exported, since it cannot be obtained under £3 17s 10½d per ounce. Gold price variations would then range only between £3 17s 6d and £3 17s 9d. By watching market price—increasing paper issues when price inclined toward £3 17s 6d or under, limiting or withdrawing paper when price inclined toward £3 17s 9d or more—there would probably not be a dozen transactions yearly in gold purchase and sale; if there were, they would always be advantageous, leaving small profit. Still, a liberal gold provision is proper, as suggested earlier, in case it proves expedient to correct foreign exchanges by exporting gold as well as reducing paper.
Thirteenth Regulation
This requires Commissioners to pay notes on demand in gold coin.
Fourteenth Regulation — One-Pound Notes
This provides one-pound notes for country circulation. On first establishment only, these are issued in London, then countersigned in the country. As a check on country agents, every note might be sent from London numbered and signed; the agent should countersign before issuing to the public, and be strictly responsible for the full amount sent, like stamp distributors. Country agents ought to correspond constantly with the London district. If a country agent gives one hundred one-pound notes for a one-hundred-pound note, he must report this, sending the larger note. His London account would be credited and debited accordingly. If he receives one hundred pounds in notes and gives a bill on another district, he must advise both the London district and the district on which the bill is drawn, sending up the note. His account is credited for this one hundred pounds; the other district’s agent is charged. Security for fraud detection is nearly perfect, since vouchers for every transaction originate in London and must return there or remain with the country agent.
Fifteenth Regulation
This is merely explanatory of earlier regulations.
Sixteenth Regulation
This directs Commissioners to act as banker to public departments only.
Estimated Savings
The country would save at least £750,000 annually. With paper circulation of twenty-five millions and government deposits of four millions, total twenty-nine millions. Interest would be saved on all this except perhaps six millions retained as gold coin and bullion deposits. At three percent on twenty-three millions, the public gains £690,000. Adding £248,000 now paid for public debt management gives £938,000. Supposing expenses of £188,000, the annual saving would be £750,000.
Centralized Control
Only the London Commissioners may make original note issues. Country agents may exchange one note description for another, or give bills for notes, but every note must first be issued by London Commissioners, keeping everything under their cognizance. Redundant circulation in any district is transferred to London; deficiencies are supplied from London.
Main Arguments
The central argument of the work is that the issuance of paper currency is a function that properly belongs to the State rather than to a private banking corporation. Ricardo contends that the Bank of England’s two operations—issuing currency and lending money—are distinct and can be separated without harm to commerce. He argues that the Government’s debt to the Bank exceeds the total value of notes in circulation, meaning that the Bank’s lending activities are funded not by its note issue but by its other resources. Consequently, transferring the note-issuing privilege to the State would not diminish the availability of credit to merchants, as private discount brokers already handle the bulk of commercial lending. Ricardo further argues that the danger of Government abuse of the currency is best addressed not by leaving issuance in private hands but by creating an independent body of Commissioners insulated from ministerial influence. The plan’s detailed regulations are designed to ensure convertibility of notes into gold, to prevent forgery, to manage the circulation across districts, and to generate substantial savings for the public. The argument consistently emphasizes that the profits of currency issuance should accrue to the nation rather than to a private corporation, while security against abuse is maintained through institutional design rather than through reliance on the self-interest of Bank directors.
Key Concepts
The work introduces and develops several key concepts. The distinction between issuing currency and lending money is fundamental, allowing Ricardo to argue that these functions need not be combined in a single institution. The concept of independent Commissioners, removable only by Parliament and forbidden from any money transactions with Government, is central to his proposal for preventing abuse. The idea that the amount of advances to merchants depends on the amount of money in circulation, not on the identity of the issuer, underpins his claim that commerce would not suffer from the reform. The regulation of paper currency by reference to the market price of gold, with the Commissioners obliged to buy gold at a fixed minimum price, provides a mechanism for maintaining convertibility and preventing over-issuance. The distinction between London and country districts, with notes payable only in their district of issue but bills available for remittances, addresses the practical problem of regional circulation. The concept of centralized control, with all original note issues emanating from London and country agents acting under strict accountability, is designed to prevent fraud and maintain oversight. The calculation of national savings from the plan, based on interest saved on circulation and debt management costs, demonstrates the economic benefits of the proposal.
Themes
Several themes emerge from the work. The relationship between public authority and private interest is a persistent concern, with Ricardo arguing that the public interest is best served by transferring the profits of currency issuance from the Bank to the State. The theme of institutional design for preventing abuse runs throughout, with the Commissioner solution presented as superior to reliance on the Bank’s resistance to ministerial pressure. The work also reflects a broader theme of economic efficiency, emphasizing that metallic currency represents unproductive capital and that paper money, properly managed, allows national resources to be devoted to productive uses. The theme of trust and security in monetary arrangements is central, with Ricardo addressing fears of Government over-issuance and proposing mechanisms to ensure convertibility. The work also engages with the theme of regional integration, as the plan must accommodate the circulation of notes across different districts while maintaining security against fraud. The theme of public economy, or the prudent management of national finances, is evident in the detailed calculations of savings and the emphasis on reducing the burden of debt management. Finally, the work reflects a theme of reform and improvement, proposing a systematic restructuring of a major national institution in the service of the public good.
The Author’s Conclusions
Ricardo concludes that the Bank of England should be deprived of the privilege of issuing paper money, with this function transferred to the State acting through independent Commissioners. He maintains that this change would not impair commerce, as the amount of money in circulation would remain the same and merchants would continue to have ample access to credit through private channels. The Bank’s lending operations, funded by its capital and deposits rather than its note issue, could continue or the Bank could dissolve without inconvenience to the public. The danger of Government abuse of the currency is best addressed through the creation of Commissioners who are independent of ministerial control and forbidden from lending to Government. The detailed regulations he proposes would ensure the smooth transition from Bank-issued to State-issued currency, maintain convertibility into gold, prevent forgery, and manage the circulation across districts. The plan would save the country at least £750,000 annually, representing the interest on the circulation and the costs of debt management that would no longer be paid to the Bank. The work thus concludes that the reform is both safe and beneficial, offering the public the profit from paper currency without reducing security against its inconveniences.
Significance
The work is significant as a practical proposal from one of the most important political economists of the nineteenth century, applying theoretical principles to a concrete institutional reform. It represents an early and influential argument for the nationalization of currency issuance, a position that would be debated throughout the nineteenth century and eventually realized in various forms in different countries. The plan’s emphasis on independent management of the currency, insulated from political pressure, anticipates later discussions of central bank independence. The detailed regulatory scheme demonstrates Ricardo’s concern with practical implementation, addressing issues of convertibility, forgery prevention, regional circulation, and accountability. The work also contributes to the broader debate over the proper relationship between Government and the banking system, arguing that the profits of currency issuance should accrue to the public rather than to private shareholders. The estimated savings of £750,000 annually provided a concrete measure of the benefits of reform, making the argument compelling to policymakers. The work’s posthumous publication, with the editorial explanation of its origins, adds to its historical interest, offering insight into Ricardo’s thinking in the final period of his life. The plan remains a notable contribution to the literature on monetary reform and the institutional design of currency systems.
