A note on the coins of old
The amount of bank notes in circulation was not as much as that of coins103 and this persisted until the opening year of WWI (1914). So the main form of reserves for banks, including the Bank of England, was gold coins. The amount of gold coins in England, which were limited because of bimetallism inequalities and other issues / factors, began to increase toward the end of the seventeenth century at the expense of silver coins. The main reason was that the market price of silver metal was increasing relative to gold and thus became undervalued at the mint. The consequence was that silver coins were melted down and as a result silver ceased to be minted as coin money.
The gold coin in circulation at that time was the guinea (first minted in 1663) and the sovereign (from 1816). Its value was fixed in 1719 on the advice of Sir Isaac Newton (yes, the celebrated mathematician and physicist!), who was then Master of the Mint, at a value of 21 shillings (equivalent to a mint price for gold of £3 17s 10%d per ounce, fifteen-sixteenths fine). This price was maintained until 1939.104 The literature is not forthcoming on the background and details of this price. A reasonable conclusion to be drawn is that the level of the price of gold was not a major issue; what was is the fact that the price of gold was fixed for a long period, thus ensuring that debasement by kings / governments could not take place. So money creation by re-coining coin money with a lower precious metal content and/or weight could not take place during this period.
In the meantime, another milestone in money history was emerging: that of coins of metallic content way below their face value being minted and used for small payments. The latter was a major problem for a long time and gold coins were only suitable for the settlement of large debts. This issue took final form after 1819 when the mint started producing "silver" and "copper" coin money with a metallic content way below their face value: token money. Very quickly these became to be generally accepted as a means of payments. This development is particularly significant because the way was paved for the general acceptability of token money, that is, the money of the future.
From convertibility to inconvertibility
We return from a branch to the stem of this text: convertibility of bank notes and deposits into gold. Given a fixed gold price of £3 17s 10%d per ounce, anyone with four one-pound bank notes could walk into the Bank of England's banking hall in London and demand an ounce of gold, fifteen-sixteenths fine (and get some change). This could also be done with the other banks in London and in the country. However, this action was rare for long periods; the Bank of England note was becoming the accepted means of payments countrywide. The inconvertible bank note, another large step in the evolution of money, was for the future.
In the latter part of the eighteenth century and the first part of the nineteenth century many country banks sprouted; in the main they were partnerships of less than six partners. Many of them failed when they squandered the confidence of the public. Newlyn105 informs that "...the country banks, being confined to partnerships, operated on a small scale and were highly unstable.. .in the first quarter of the nineteenth century 265 country banks went bankrupt." The ones that did not fail generally had accounts with the larger London banks and/or the Bank of England and were able to meet withdrawals with Bank of England notes and/or gold coins.
Convertibility of bank notes and deposits into gold in England (and elsewhere) was suspended on two occasions and finally in 1931 when Britain left the "gold standard". It is significant that during these times and after 1931 bank notes became mere tokens, that is, were accepted at their face value.106 The first period referred to is 1797, when rumors of a French invasion were rife, until 1819. When the rumors emerged there were "runs" on all banks and parliament ordered the Bank of England to suspend payments of notes and deposits in gold coins.
The second period was from the outbreak of WWI in 1914 to 1925. From 1914 a revolution in money history in Britain took place: gold coins were gradually called in and replaced by Bank of England notes. From 1925 to 1931 notes were convertible (into gold bullion107, not coins, at that stage) but, as this fact was not stated on the bank notes, few people took advantage of this. As noted, the gold standard was abandoned in 1931108 and since then all forms of money have been used as token money, that is, according to face value and by count. The liabilities of banks109, that is, bank notes and deposits and coins of little intrinsic value, without any backing of precious metals, had become the generally accepted means of payment: money.
The intrinsic brake on excessive money creation in the form of convertibility of bank notes and deposits was removed. Banks no longer had the need to hold a reserve of gold against bank note and deposit issues. It is this fact that causes some commentators on the monetary system of today to wax hysterical. As we shall see, the system of convertibility was replaced by another, a fine system, which removes the constraint of precious metal availability on economic growth. The mammoth proviso, as we have mentioned, is that the system has to me managed in a non-promiscuous, responsible manner by the referee: the central bank.