Bank of England

Functions of the bank

It performs all the recognized functions of a central bank -- to maintain price stability, and subject to that, to support the economic policy of Her Majesty's Government (Bank of England Act 1998). It has a monopoly on the issue of banknotes in England and Wales (see Sterling); it is both the Government's banker and the bankers' bank; a "Lender of Last Resort"; it manages the country's foreign exchange and gold reserves and the Government's stock register; it used to be responsible for the regulation and supervision of the banking industry (see Johnson Matthey, BCCI, and Barings), although this responsibility was transferred to the Financial Services Authority in June 1998. Since 1997 the Monetary Policy Committee has had the responsibility for setting the official interest rate. 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. It maintains the Government's Consolidated Fund account.

The current Governor of the Bank of England is Sir Mervyn Allister King, who took over on June 30, 2003 from Sir Edward George.

History

The bank was founded along with the Bank of Scotland by William Paterson in 1694 to act as the English Government's banker; the Bank of Scotland was to be the Scottish 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 banking privileges including the issue of notes. The Royal Charter was granted on July 27, 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 1994. The charter was renewed in 1742, 1764, and 1781. In 1734 the Bank moved to its current location on Threadneedle Street, slowly acquiring the 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 February 26, 1797 when war had so diminished gold reserves that the Government prohibited the Bank from paying out in gold. This 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.

The nearest London Underground station, and thus a busy commuter stop, is Bank station.

In 1997 the bank's Monetary Policy Committee was given sole responsibility for setting interest rates to meet the Government's stated inflation target of 2.5%. This decision was taken by the Chancellor of the Exchequer, Gordon Brown immediately following the 1997 general election. However the idea was originally that of Conservative MP Nicholas Budgen who proposed it as a Private Members Bill in 1996, the bill failed as it had neither the support of the government or the opposition. The act of 1997 is almost verbatim what Budgen proposed in 1996. Should inflation miss the target by over 1%, the governor would have write a letter to the Chancellor of the Exchequer explaining why and how he would remedy the situation. This was an astute move for several reasons;

• it removed the polically controversial responsibility from the government
• it was very popular with the City of London, showing a sign of the new governments desire for a strong economy
  • Following the announcement the FTSE 100 leapt rapidly and,
  • the Pound reached its highest level against the Deutschmark since Sterling's exit from the ERM

Banknote issues

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, no doubt to the relief of the banks' workers. Until 1928 all notes were "White Notes", printed in black and with a blank reverse. During the 20th century White Notes were issued in denominations between £5 and £1000, but in the 18th and 19th centuries there were White Notes for £1 and £2. 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 in an attempt to destabilise the British economy, producing 500,000 notes each month in 1943 -- although most fell into Allied hands at the end of the war, forgeries were frequently appearing for years afterward, so all denominations of banknote above £5 were subsequently removed from circulation.

All old Bank of England notes remain exchangeable for current notes forever. Notes can either be taken in person to the Bank in London during normal business hours, or sent by post at the sender's risk to:

Exchanges,
Custodial Services,
Threadneedle Street,
London EC2R 8AH

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