The Governor and Company of the Bank of England is the central bank of the
United Kingdom, and as such it convenes the Monetary Policy Committee, which is responsible for the monetary policy of the country. It was established in 1694 to act as the English Government's banker,
and to this day it still acts as the banker for the UK Government. The Bank's building is located in the City of London, in Threadneedle Street and hence it is
sometimes known as The Old Lady of Threadneedle Street or The Old Lady. The current Governor of the Bank of England is Mervyn
King, who took over on June 30 2003 from Sir Edward George.
Functions of the Bank
The Bank of England performs all the functions of a central bank. The most important of these supposed to be maintaining price
stability and supporting the economic policies of the UK's government, thus
promoting economic growth. There are two main areas which are tackled by the Bank to ensure it carries out these functions
efficiently:
- Stable prices and confidence in the currency are the two main criteria for monetary
stability. Stable prices are maintained by making sure 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, and through its communications strategy.
- Maintaining financial stability involves protecting against threats to the whole financial system. Threats are detected by
the Bank's surveillance and market intelligence functions. 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 several other institutions to secure both monetary and financial stability, including:
- HM Treasury, the Government department responsible for financial and economic
policy.
- The Financial Services Authority, an independent body that regulates
the financial services industry.
- Other central banks and international organisations, with the aim of improving the international financial system.
The 1997 Memorandum of Understanding describes the terms under which the
Bank, the Treasury and the FSA work toward the common aim of increased financial stability.
The Bank of England acts as the Government's banker, and as such it maintains the Government's Consolidated Fund account. It also manages the country's foreign exchange and gold reserves. The Bank
also acts as the bankers' bank, especially in its capacity as a lender of last resort, and to maintain its pragmatic experience
in all aspects of banking also provides commercial and retail banking facilities to a very limited number of corporate
institutions and individuals.
The Bank of England 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 to one
with deposits in the Bank of England, excepting a few million pounds representing the value of notes they had in circulation in
1845. The Bank decided to sell its bank note printing operations to De La Rue in December
2002, under the advice of Close Brothers Corporate Finance Ltd.[1]
Since 1997 the Monetary Policy Committee has had the responsibility for setting the official interest rate. However, with the
decision to grant the Bank operational independence, responsibility for government debt management was transferred to the new
UK Debt Management Office in 1998, which also took over government cash
management in 2000. Computershare took over as the registrar for UK Government bonds
(known as gilts) from the Bank at the end of 2004.
The Bank used to be responsible for the regulation and supervision of the banking industry,
although this responsibility was transferred to the Financial Services Authority in June 1998.
In order to help maintain economic stability, the Bank attempts to broaden understanding of its role, both through regular
speeches and publications by senior Bank figures, and through a wider education strategy aimed at the general public. It
maintains a free museum and runs the Target Two Point Zero competition for A-level
students.[2]
History
The main Bank of England façade, c.
1980.
The bank was founded by the Scotsman William
Paterson, in 1694 to act as the English government's banker. He proposed a loan of £1.2m to the government; in return the
subscribers would be incorporated as The Governor and Company of the Bank of England with long term banking privileges
including the issue of notes. Only £750,000 of these funds were ever deposited with the Bank, the rest was generated by
Fractional Reserve Banking. The Royal Charter was granted on July 27 through the passage of the Tonnage Act of 1694. Public finances were in so
dire a condition at the time that the terms of the loan were that it was to be serviced at a rate of 8% per annum, and there was
also a service charge of £4000 per annum for the management of the loan. The first governor was Sir John Houblon, who is depicted in the £50 note issued in 1990. The charter was renewed in 1742, 1764, and
1781. The Bank was originally constructed above the ancient Temple of Mithras,
London at Walbrook, dating to the founding of Londinium in antiquity by Roman
garrisons. Mithras was, among other things, considered the god of contracts, a fitting
association for the Bank. In 1734 the Bank moved to its current location on Threadneedle Street, slowly acquiring the land to
create the edifice seen today. Sir Herbert Baker's rebuilding of the Bank of England,
demolishing most of Sir John Soane's earlier building was described by Pevsner as "the greatest architectural crime, in the City of London, of the twentieth century".
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 February 26,
1797 when war had so diminished gold reserves that the
government prohibited the Bank from paying out in gold. This prohibition lasted until 1821.
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 which 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. The Scottish and Northern Irish private banks still have that right. Britain remained on the gold standard until 1931 when the gold and foreign exchange reserves were transferred to the
Treasury. But their management was still handled by the Bank. In 1870 the bank was given
responsibility for interest rate policy.
During the governorship of Montagu Norman, which lasted from 1920 to
1944, 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.
In 1997 the bank's Monetary Policy Committee was given sole responsibility for setting interest rates to meet the Government's
stated Retail Prices Index inflation target of 2.5%.[3] This decision was taken by the Chancellor of the Exchequer, Gordon Brown in consultation with Tony Blair prior to the 1997 general election though the announcement was made the day after the election.
The target has now changed to 2% since the consumer price index (CPI) replaced the
retail price index (RPI) as the treasury's inflation index.[4] Should inflation overshoot or undershoot the target by more than 1%, the
Governor will have to write a letter to the Chancellor of the Exchequer
explaining why, and how he will remedy the situation.
An independent Bank of England had featured as a key plank of the Liberal Democrats
economic policy since the 1992 general election.[5] A
Conservative MP Nicholas Budgen had also proposed this as a Private Member's Bill in 1996, but the bill failed as it had neither the support of the government
nor that of the opposition.
Banknote issues
-
- See also: Banknotes of the pound
sterling
The Bank of England 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 1928 all notes were "White Notes", printed in black and with a blank reverse. In the 18th and 19th centuries White Notes
were issued in £1 and £2 denominations. During the 20th century White Notes were issued in denominations between £5 and £1000. In
the twentieth century, the Bank issued notes for ten shillings and one pound for the first time
on 22 November 1928 when the Bank took over responsibility for
these denominations from the Treasury which had issued notes of these denominations three days after the declaration of
war in 1914 in order to remove gold coins from
circulation.
During the Second World War the German Operation
Bernhard attempted to counterfeit various denominations between £5 and £50 producing 500,000 notes each month in 1943. The
original plan was to parachute the money on Britain in an attempt to destabilise the British economy, but it was found more
useful to use the notes to pay German agents operating throughout Europe — although most fell into Allied hands at the end of the war, forgeries frequently appeared for years afterwards, which led banknote
denominations above £5 to be removed from circulation.
In 2006, a sum in excess of £53 million in banknotes belonging to the bank was stolen from a depot in Tonbridge.
See also
References
External links
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