This article explores a dilemma at the centre of the monetary order: how to counter inflation eroding the value of money and simultaneously allow bank-created credit to meet the needs of an expanding economy. Building on recent scholarship on the history of money, the article analyses the Bank Charter Act of 1844 and the financial crisis of 1847 to reveal a response to this dilemma which continues to shape the modern context. That response relies on ex ante restrictive measures in a bid to limit the discretion of the monetary authorities and cultivate financially prudent behaviour. Yet the history of the mid-nineteenth century exposes the challenges faced by those who enforce such rules, challenges which tie the mid-nineteenth century to the post 2008 reforms in both the US and the Eurozone, and reveal the ongoing force of the dilemma: that simultaneous desire for both expansive credit and sound money.

In the late eighteenth and early nineteenth century, communities across England used country bankers’ notes almost as much as they used coins and Bank of England notes. Accounting for the relative success of these alternative currencies is challenging, however, due to the frequency of financial crisis during the period. If, during a crisis, all note holders attempted to enforce the promise to pay in gold coin against the issuing banker, the ‘law‐finance paradox’ would leave some note holders with gold coin, but would leave many more with merely ‘country rags’ or worthless pieces of paper. Building on both the credit approach to money and the relational approach to contract, this article shows note‐using communities successfully responding to financial crisis. They frequently did so by formalizing the bonds of reciprocity and trust tying the community to its note‐issuing banker – bonds sometimes made all the stronger by legal enforceability.

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