Panic of 1797

'And, ...when any panic arose, who was the first to rush forward to secure his property? The poor man. And thus was the panic commenced. Example, however, was contagious. It appeared, therefore, that the power of issuing these notes was one great source of the insecurity of country bankers. Men placed in such situations, and liable to such influences, could not be said to hold their credit upon permanent and secure foundations. Was not, then, the remedy to be found in getting rid of the dangerous part of this paper circulation, and in making the attempt, was he proposing anything new? Quite the contrary. The propriety of restricting the circulation of small notes was never questioned. Fifty years ago parliament passed an act (in 1773) prohibiting the circulation of any notes under 20£. In 1777 this restriction, for the better accommodation of the increasing trade of the country, was removed, and permission granted to issue notes not under 5£; and in 1787, that act, which had been passed for a temporary purpose, was made perpetual. In that state the law continued until 1797, when one and two pound notes were first brought into circulation. When the Bank Restriction Act of 1797 was passed, it was clear, that unless the prohibition were withdrawn from the circulation of the smaller notes, the country would be altogether deprived of the means of carrying on its business.'
 
The text above is from the Edinburgh Annual Register for1826; by Walter Scott.  This piece appeared at a time when Scott was facing his own personal crisis with the Panic of 1825/6.  Scott authored his famous Malagrowther Letters during 1826, which helped Scotland stave off English efforts to eliminate small pound notes.  From the English perspective, these notes were not backed by specie.

The Bank of England itself had to suspend cash payment during the Panic of 1797, issuing its own notes instead.  These were war years, with efforts against France adding to the national debt, and resulting in transmission of coin overseas to fund soldiers.  As in Scott's poorer Scotland, England found specie becoming scarce.  The economy depends on circulation, and on February 26, 1797, the British Government authorized notes of the BOE as legal tender.