Bank of England

Bank of England
Bank of England.svg
Headquarters Threadneedle Street
London, EC2
England
Coordinates 51°30′51″N 0°05′18″W / 51°30′51″N 0°05′18″W / 51.51406; -0.08839
Established 27 July 1694; 323 years ago (1694-07-27)
Governor Mark Carney
Central bank of United Kingdom
Currency Pound sterling
GBP ( ISO 4217)
Reserves £565 billion [1]
Reserve requirements None
Bank rate 0.25% [2]
Interest rate target 0.5%
Interest on reserves 0.25%
Interest paid on excess reserves? Yes, since Quantitative easing began in 2009
Website www.bankofengland.co.uk
Headquarters

The Bank of England, formally the Governor and Company of the Bank of England, is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in operation today, after the Sveriges Riksbank. The Bank of England is the world's 8th oldest bank. It was established to act as the English Government's banker and is still one of the bankers for the Government of the United Kingdom. The Bank was privately owned by stockholders from its foundation in 1694 until it was nationalised in 1946. [3] [4]

In 1998, it became an independent public organisation, wholly owned by the Treasury Solicitor [5] on behalf of the government, with independence in setting monetary policy. [6] [7] [8] [9]

The Bank is one of eight banks authorised to issue banknotes in the United Kingdom, but it 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. [10]

The Bank's Monetary Policy Committee has a devolved responsibility for managing monetary policy. The 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. [11] The Bank's Financial Policy Committee held its first meeting in June 2011 as a macro prudential regulator to oversee regulation of the UK's financial sector.

The Bank's headquarters have been in London's main financial district, the City of London, on Threadneedle Street, since 1734. It is sometimes known by the metonym The Old Lady of Threadneedle Street or The Old Lady, a name taken from the legend of Sarah Whitehead, whose ghost is said to haunt the Bank's garden. [12] The busy road junction outside is known as Bank junction.

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. [13] Until 2016, the bank provided personal banking services as a popular privilege for employees. [14]

History

Founding

The sealing of the Bank of England Charter (1694)

England's crushing defeat by France, the dominant naval power, 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 in London that it was impossible for it to borrow the £1,200,000 (at 8% p.a.) 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. [15] 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.

As a side effect, the huge industrial effort needed, including establishing ironworks to make more nails and advances[ clarification needed] in agriculture feeding the quadrupled strength of the navy, started to transform the economy. This helped the new Kingdom of Great BritainEngland and Scotland were formally united in 1707 – to become powerful. The power of the navy made Britain the dominant world power in the late 18th and early 19th centuries. [16]

The establishment of the bank was devised[ clarification needed] by Charles Montagu, 1st Earl of Halifax, in 1694. The plan of 1691, which had been proposed by William Paterson three years before, had not then been acted upon. [17] (It is worth noting though, that 28 years earlier, in 1636, Financier to the king Philip Burlamachi had proposed exactly the same idea in a letter addressed to Sir Francis Windebank.) [18] 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. The Royal Charter was granted on 27 July through the passage of the Tonnage Act 1694. [19] Public finances were in such dire condition at the time[ citation needed] 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 £4,000 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.

18th century

Satirical cartoon protesting against the introduction of paper money, by James Gillray, 1797. The "Old Lady of Threadneedle St" (the Bank personified) is ravished by William Pitt the Younger.

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 (Mithras is – rather fittingly – said to have been worshipped as, amongst other things, the God of Contracts); [20] the Mithraeum ruins are perhaps the most famous of all 20th-century Roman discoveries in the City of London and can be viewed by the public.

The Bank moved to its current location in Threadneedle Street in 1734, [21] and thereafter slowly acquired neighbouring land to create the edifice seen today. Sir Herbert Baker's rebuilding of the Bank, demolishing most of Sir John Soane's earlier building, was described by architectural historian Nikolaus 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. During the American war of independence, business for the Bank was so good that George Washington remained a shareholder throughout the period. [22] 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 that - following an invasion scare caused by the Battle of Fishguard days earlier - the government prohibited the Bank from paying out in gold by the passing of the Bank Restriction Act 1797. This prohibition lasted until 1821.

19th century

Bank Stock of the Bank of England, issued 25. January 1876

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. Scottish and Northern Irish private banks still have that right.

The bank acted as lender of last resort for the first time in the panic of 1866. [23]

The last private bank in England to issue its own notes was Thomas Fox's Fox, Fowler and Company bank in Wellington, which rapidly expanded, until it merged with Lloyds Bank in 1927. They were legal tender until 1964. There are nine notes left in circulation; one is housed at Tone Dale House Wellington.

20th century

The main Bank of England façade, c. 1980

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.

After 1945 the Bank pursued the multiple goals of Keynesian economics, especially "easy money" and low interest rates to support aggregate demand. It tried to keep a fixed exchange rate, and attempted to deal with inflation and sterling weakness by credit and exchange controls. [24]

In 1977, the Bank set up a wholly owned subsidiary called Bank of England Nominees Limited (BOEN), a private limited company, with two of its hundred £1 shares issued. According to its Memorandum & Articles of Association, its objectives are: "To act as Nominee or agent or attorney either solely or jointly with others, for any person or persons, partnership, company, corporation, government, state, organisation, sovereign, province, authority, or public body, or any group or association of them...." Bank of England Nominees Limited was granted an exemption by Edmund Dell, Secretary of State for Trade, from the disclosure requirements under Section 27(9) of the Companies Act 1976, because "it was considered undesirable that the disclosure requirements should apply to certain categories of shareholders." The Bank of England is also protected by its Royal Charter status, and the Official Secrets Act.[ citation needed] BOEN is a vehicle for governments and heads of state to invest in UK companies (subject to approval from the Secretary of State), providing they undertake "not to influence the affairs of the company". [25] [26] BOEN is no longer exempt from company law disclosure requirements. [27] Although a dormant company, [28] dormancy does not preclude a company actively operating as a nominee shareholder. [29] BOEN has two shareholders: the Bank of England, and the Secretary of the Bank of England. [30]

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: see reserve requirement for more details. The contemporary transition from Keynesian economics to Chicago economics was analysed by Kaldor in The Scourge of Monetarism [31]

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. [32] 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 of 2.5%. [33] The target has changed to 2% since the Consumer Price Index (CPI) replaced the Retail Prices Index as the Treasury's inflation index. [34] If inflation overshoots or undershoots the target by more than 1%, the Governor has to write a letter to the Chancellor of the Exchequer explaining why, and how he will remedy the situation. [35]

The success of inflation targeting in the United Kingdom has been attributed to the Bank's focus on transparency. [36] The Bank of England has been a leader in producing innovative ways of communicating information to the public, especially through its Inflation Report, which have been emulated by many other central banks. [37]

Independent central banks that adopt an inflation target are known as Friedmanite central banks. Inflation targets combined with central bank independence have been characterised as a "starve the beast" strategy creating a lack of money in the public sector. This change in Labour's politics was described by Sidelsky in The Return of the Master [38] as a mistake and as an adoption of the Rational Expectations Hypothesis as promulgated by Walters [39]

The handing over of monetary policy to the Bank had been a key plank of the Liberal Democrats' economic policy since the 1992 general election. [40] Conservative MP Nicholas Budgen had also proposed this as a private member's bill in 1996, but the bill failed as it had the support of neither the government nor the opposition.

21st century

Mark Carney assumed the post of Governor of the Bank of England on 1 July 2013. He succeeded Mervyn King, who took over on 30 June 2003. Carney, a Canadian, will serve an initial five-year term rather than the typical eight, and will seek UK citizenship. [41] He is the first non-British citizen to hold the post. As of January 2014, the Bank also has four Deputy Governors.

Other Languages
Alemannisch: Bank of England
العربية: بنك إنجلترا
azərbaycanca: Bank of England
беларуская: Банк Англіі
български: Банка на Англия
čeština: Bank of England
Cymraeg: Banc Lloegr
Esperanto: Banko de Anglio
Gaeilge: Banc Shasana
Gàidhlig: Banca Shasainn
Bahasa Indonesia: Bank of England
íslenska: Englandsbanki
lietuvių: Anglijos bankas
македонски: Банка на Англија
Bahasa Melayu: Bank England
မြန်မာဘာသာ: အင်္ဂလန်ဘဏ်
Nederlands: Bank of England
oʻzbekcha/ўзбекча: Angliya banki
polski: Bank Anglii
română: Banca Angliei
русский: Банк Англии
Simple English: Bank of England
slovenčina: Bank of England
srpskohrvatski / српскохрватски: Engleska banka
українська: Банк Англії
Tiếng Việt: Ngân hàng Anh
粵語: 英倫銀行