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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, on 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.

Contents

Functions of the Bank

History

Changes in targets

Banknote issues

In fiction

See also

References

External links

Functions of the Bank

The Bank of England performs all the functions of a central bank. The most important of these are 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:

★ Monetary Stability
: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.

★ Financial Stability
: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 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 banking privileges including the issue of notes. 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 CPI inflation target of 2.0%^[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. 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 target has now changed to 2% since the consumer price index (CPI) replaced the retail price index (RPI) as the treasury's inflation index. CPI / RPI figures are produced in Britain by the Office for National Statistics, whose independence from direct political control and interference was announced in 2005, also by the Chancellor of the Exchequer, Gordon Brown. He modelled this move on his decision affecting the Bank of England.
An independent Bank of England had featured as a key plank of the Liberal Democrats economic policy since the 1992 general election.^[4] 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 2006 a sum in excess of £53 million in banknotes belonging to the bank was stolen from a depot in Tonbridge, see Securitas depot robbery.

Changes in targets

'1980-86' Tracking the Money Supply.
During Thatcher's first term in office, the growth in the money supply was strictly limited to curb inflation, which was in double digits at the time she took office.
'1986-92' Tracking Exchange Rates.
This policy focused on keeping Sterling stable (within a narrow range of exchange rates) against a weighted basket of European currencies. Sharp rises in interest rates in a desperate attempt to prop up the value of Sterling against this basket was a major contributor to the devaluation known as Black Wednesday.
'1993-97' Tracking Broad Money.
Largely as a result of Black Wednesday, exchange rate tracking was abandoned and the BoE returned to focusing on the Money Supply.
'1997 onwards' Targeting CPI.
Although there has been much praise heaped on Gordon Brown for making the BoE more 'independent', arguable the greatest change he made to the bank in 1997 was not the creation of the MPC, but rather the change in the Bank's target. The bank now targets CPI inflation. The bank has been extremely successful in meeting its new target (it has only missed it on only two months since 1997), however the CPI is such a narrow measure of inflation that even with the bank hitting its targets, house price inflation has been in or near double digit growth for several years now^[5], as has the growth in the M4 money supply^[6]
.

Banknote issues

Main articles: Bank of England note 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. 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 to banknote denominations above £5 to be removed from circulation.

In fiction

★ In ''Around the World in Eighty Days'', Phileas Fogg is hunted around the world under the suspicion that he robbed the Bank of England.

★ In ''The Million Pound Note'' by Mark Twain, a penniless American is given a million-pound note as a practical joke to settle a bet.

★ The bank is the centre of the villain Alec Trevelyan's plan in the 1995 James Bond film ''GoldenEye'' and Bond must stop his one time friend Trevelyan from using the GoldenEye EMP satellite Mischa to detonate over London and cripple the bank after Trevelyan steals a huge sum of money from the bank electronically.

★ In The League of Extraordinary Gentlemen a German tank robs the Bank of England

See also

★ Bank of England Museum

★ Bank of Japan

★ British coinage

★ Sterling banknotes

★ European Central Bank

★ Federal Reserve

★ HM Treasury

★ Pound sterling

★ UK topics

★ Financial Sanctions Unit

★ East India Company shareholders

References

1. Sale of Bank Note Printing
2. Bank of England: Education
3. {{cite web|url=http://www.bankofengland.co.uk/monetarypolicy/framework.htm
4. Liberal Democrat election manifesto, 1992
5. {{cite web|url=http://news.bbc.co.uk/1/hi/business/6943797.stm
6. {{cite web|url=http://213.225.136.206/mfsd/iadb/fromshowcolumns.asp?Travel=NIxSTxTAxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=1997&TD=22&TM=Aug&TY=2007&VFD=N&html.x=23&html.y=17&CSVF=TT&C=E55

External links

★ Bank of England official site

★ 1694 Act of Parliament founding the bank