Bank of England
June 16th, 2008
The Bank's headquarters has been located in London's main financial district, the City of London, on Threadneedle Street, since 1734. It is sometimes known as The Old Lady of Threadneedle Street or just The Old Lady. The Governor of the Bank of England is Mervyn King who took over on June 30, 2003 from Sir Edward George.
The Bank of England performs all the functions of a central bank. The most important of these is supposed to be maintaining price stability and supporting the economic policies of the British Government, thus promoting economic growth.
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 (and remains to this day government owned).
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%. This decision was taken by the Chancellor of the Exchequer, Gordon Brown in consultation with Tony Blair prior to their election in 1997 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. 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.
The handing over of monetary policy to the Bank of England had featured as a key plank of the Liberal Democrats' economic policy since the 1992 general election. 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.
In May 1997 The Governor and Company of the Bank of England regained their independence from Nationalisation and operate within the United Kingdom with autonomy from Government but under charter to it. The 1998 Bank of England Act made changes to the Bank's governing body. The Court of Directors, as it's known, is now made up of the Bank's Governor and 2 Deputy Governors, and 16 Non-Executive Directors.
More recently the Bank of England, in its role as lender of last resort has, since 2007, been supporting Northern Rock, a specialist mortgage lender that suddenly became unable to rely on wholesale market borrowing to finance its lending operation following the 2007 subprime mortgage financial crisis and the subsequent reluctance of lenders to take on more mortgage debt.
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. 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, Kent.
