Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Issues such as the convertibility of paper currency to gold and the viability of modern monetary theory (MMT) were addressed more than 200 years ago by England, soon after the U.S. became independent.

On February 22, 1797, the Black Legion – 46 officers and 1,178 soldiers of France’s Revolutionary Army – landed in Wales, near the port of Fishguard. La Seconde Légion des Francs had acquired its nickname from the dark brown cloth of uniforms. They had been dyed to cover up their original colors – the red, white, green, yellow, blue and orange threads that were in the various weaves worn by the Scottish, Yorkshire and Somersetshire regiments of Foot and Irish Dragoon guards. Those men had been forced to leave behind their spare uniforms, along with most of their muskets and cannon, when the 1795 English-French Royalist attack on the Quiberon Peninsula had failed. The Black Legion’s landing was equally unsuccessful. Two days after coming ashore, the Black Legion would surrender to the local Welsh militia.

That same evening the first bits of information about the events around Fishguard would begin to arrive in London and become the news. On the following day, Saturday, February 25, the Morning Chronicle and the Morning Herald would publish the story: England invaded by Revolutionary France! When the Bank of England opened for business, a number of its account and note holders politely but firmly pressed their way towards the cashiers’ windows to demand exchanges of paper into coin. By the end of the day, nearly half of the bank’s gold coin had been paid out in redemptions. (The bank held no reserves of silver; ever since Isaac Newton’s recoinage had set silver coins’ official denominations below their exchange price, the country had been drained of the metal. To supply even a minimum amount of sterling, the Royal Mint had resorted to restriking the Mexican and very few American silver dollars it got its hands on.) On Sunday, the bank's doors remained closed, as usual; but there was one bit of business that did occur on the Church of England’s official day of Sabbath. A printed notice appeared on the bank’s front door: by parliamentary order, all redemptions were suspended until further notice.

In the week that followed, the full details of what happened in Wales would arrive in London, but the county militia’s success in defeating the invasion would not bring any reversal of government policy. The Bank of England was going to hoard whatever gold coin it still held. Parliament’s fear was that the private holders of specie, unlike the Bank of England, would not provide the coin the Exchequer needed for bribes to England’s continental allies against the French. For the depositors and note holders who had exchanged paper for coin, the fear was that the government itself would be overthrown. The strength of the Bank of England itself was not in question. How could it be? For most of the 18th century, the Bank of England’s notes had not been merely a convenient substitute for coin; for the capital markets they had become the form of England’s money. They had to be. The Royal Mint’s production problems left it unable to provide the country with sufficient coinage in any denomination – large or small. Necessity had led to the common law making the Bank of England’s notes lawful tender for payment of judgments. In the absence of a uniform coinage, only Bank of England notes were accepted for the clearing of net balances owing from trades of private bills of credit, the notes of country banks, bonds funded by the commitment of specific tax revenues (funded debt) and the short-term borrowings by the Exchequer (unfunded debt).