Bank of England – First Ever Central Bank

The Bank of England, is the central bank of the United Kingdom and the world’s eighth-oldest bank. It is the model on which most modern central banks have been based.

The Royal Charter was granted on 27 July 1694, through the passage of the Tonnage Act to act as the English Government’s banker and nowadays for the Government of the United Kingdom. The Bank was privately owned by stockholders from its foundation in 1694 until nationalised in 1946.

In 1998, it became an independent public organisation, wholly owned by the Treasury Solicitor on behalf of the government, but with independence in setting monetary policy.

The Bank is one of eight banks authorised to issue banknotes in the United Kingdom, but has a monopoly on the issue of banknotes in England and Wales and regulates the issue of banknotes, by commercial banks in Scotland and Northern Ireland.

The Bank’s headquarters have been in London’s main financial district, the City of London, on Threadneedle Street, since 1734 (hence its nickname, “The Old Lady Of Threadneedle Street”).

FOUNDING

England’s crushing defeat by France in naval engagements, culminating in the 1690 Battle of Beachy Head, became the catalyst for England’s rebuilding itself as a global power.

England had no choice but to build a powerful navy. No public funds were available, and the credit of William III’s government was so low that it was impossible for it to borrow the £1.2m that the government wanted.

To induce subscription to the loan, the subscribers were to be incorporated by the name of the Governor and Company of the Bank of England. The Bank was given exclusive possession of the government’s balances, and was the only limited-liability corporation allowed to issue bank notes.

The lenders would give the government cash (bullion) and issue notes against the government bonds, which can be lent again. The £1.2m was raised in 12 days; half of this was used to rebuild the navy.

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18th CENTURY

The Bank’s original home was in Walbrook, a street in the City of London, where during reconstruction in 1954 archaeologists found the remains of a Roman temple of Mithras

The Bank moved to its current location in Threadneedle Street in 1734, and thereafter slowly acquired neighbouring land to create the edifice seen today.

When the idea and reality of the National Debt came about during the 18th century, this was also managed by the Bank. By the charter renewal in 1781 it was also the bankers’ bank – keeping enough gold to pay its notes on demand until 26 February 1797 when war had so diminished gold reserves.

19th CENTURY

The 1844 Bank Charter Act tied the issue of notes to the gold reserves and gave the Bank sole rights with regard to the issue of banknotes. Private banks that had previously had that right retained it, provided that their headquarters were outside London and that they deposited security against the notes that they issued.

A few English banks continued to issue their own notes until the last of them was taken over in the 1930s. Nowadays the Bank has a monopoly on the issue of banknotes in England and Wales.

Scottish and Northern Irish banks retain the right to issue their own banknotes, but they must be backed one for one with deposits at the Bank, excepting a few million pounds representing the value of notes they had in circulation in 1845.

The bank acted as lender of last resort for the first time in the panic of 1866.

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20th CENTURY

Britain remained on the gold standard until 1931 when the gold and foreign exchange reserves were transferred to the Treasury, but they continued to be managed by the Bank.

During the governorship of Montagu Norman, from 1920–44, the Bank made deliberate efforts to move away from commercial banking and become a central bank.

In 1946, shortly after the end of Norman’s tenure, the bank was nationalised by the Labour government.

In 1981 the reserve requirement for banks to hold a minimum fixed proportion of their deposits as reserves at the Bank of England was abolished:

On 6 May 1997, following the 1997 general election which brought a Labour government to power for the first time since 1979, it was announced by the Chancellor of the Exchequer, Gordon Brown, that the Bank would be granted operational independence over monetary policy.

Under the terms of the Bank of England Act 1998 (which came into force on 1 June 1998), the Bank’s Monetary Policy Committee was given sole responsibility for setting interest rates to meet the Government’s Retail Prices Index (RPI) inflation target.

The Bank’s Monetary Policy Committee has a devolved responsibility for managing monetary policy, but he Treasury has reserve powers to give orders to the committee “if they are required in the public interest and by extreme economic circumstances”, but such orders must be endorsed by Parliament within 28 days.

FUNCTIONS OF THE BANK

As a regulator and central bank, the Bank of England has not offered consumer banking services for many years, but it still does manage some public-facing services such as exchanging superseded bank notes. Until 2016, the bank provided personal banking services as a privilege for employees.

The Bank performs all the functions of a central bank. The most important of these are maintaining price stability, and supporting the economic policies of Her Majesty’s Government, thus promoting economic growth.

Stable prices and confidence in the currency are the two main criteria for monetary stability. Stable prices are maintained by seeking to ensure that price increases meet the Government’s inflation target. The Bank aims to meet this target by adjusting the base interest rate, which is decided by the Monetary Policy Committee.

Maintaining financial stability involves protecting against threats to the whole financial system. The threats are then dealt with through financial and other operations, both at home and abroad.

In exceptional circumstances, the Bank may act as the lender of last resort by extending credit when no other institution will.

The Bank works together with other institutions to secure both monetary and financial stability, including: HM Treasury and Other central banks and international organisations.

With the decision to grant the Bank operational independence, responsibility for government debt management was transferred in 1998 to the new Debt Management Office.

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BANKNOTE ISSUES

The Bank has issued banknotes since 1694. Notes were originally hand-written; although they were partially printed from 1725 onwards, cashiers still had to sign each note and make them payable to someone. Notes were fully printed from 1855.

Until the mid-19th century, commercial banks were allowed to issue their own banknotes, and notes issued by provincial banking companies were commonly in circulation. The Bank Charter Act 1844 began the process of restricting note issue to the Bank; new banks were prohibited from issuing their own banknotes and existing note-issuing banks were not permitted to expand their issue.

THE VAULT

The Bank is custodian to the official gold reserves of the United Kingdom and many other countries. The vault, beneath the City of London, covers a floor space greater than that of the third-tallest building in the City, Tower 42.

As at around 2011, the Bank was the 15th-largest custodian of gold reserves, holding around 4,600 tonnes. These gold deposits were estimated in February 2012 to have a current market value of £156,000,000,000.

Many questions exist about the Bank of England, most notably who are it’s shareholders and therefore does it act purely in the UK’s interest?

What are its connections to other central banks around the world and what agreements do they have with same?