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Home  >  Fundamental analysis  >  Central banks  >  Bank of England (BOE)

Bank of England (BOE)

The Bank of England is Great Britain's central bank and note-issuing institution which is commonly referred to as the Old Lady of Threadneedle Street for the simple reason that The Bank of England's main office is located on stands on Threadneedle Street. Eight different branches can be located throughout the British Isles. Bank of England banknotes can be used anywhere in the United Kingdom however banks located in Scotland and Northern Ireland additionally generate banknotes that can either be traded for Bank of England notes or simply used as their own currency. Aside from the issuing of banknotes, the Bank of England is responsible for all central banking transactions in Great Britain. A governor, deputy and 16 directors are in control of all the bank's actions.

It is interesting to note that although the British monarchy is in possession of the crown jewels, it does not possess a lot of gold nor liquidity. In order to combat this, joint stock companies are formed and do business with countries in the east such as India as well as the US and Canada in the west. The bank of England is responsible for all the debts of the government as well.

The bank itself was founded as a commercial bank by William Paterson in 1694. Paterson's starting capital of 1.2 million was given to the government in exchange for the rights to banking privileges which included the right to issue banknotes up to it's 1.2 million capital allowance. After only 15 short years, in 1709 the capital of the bank was doubled with the charter being renewed again in 1742, 1764 and again in 1781. The bank proved to be an important factor in British expansion both commercially and industrially. The bank functioned both publically by protecting the British pound in addition to making private profits.

The Central bank of England won the right to be the only issuer or bank notes thanks to the 1844 Bank Charter Act which linked the issuing of bank notes to gold reserves. Private banks however were able to issue notes providing that their headquarters was located outside London and that they deposited some form of security equal to the notes they issued. A small amount of British banks were still in the practice of issuing their own notes until they were all bought out in the 1930s. Exceptions to this rule are the Scottish and Northern Ireland banks who still issue their own notes. In 1870 The British banks received the responsibility to govern interest rate policy. Also interesting to note is that the British banks stayed linked to the gold standard up to 1931 at which point the treasury became the place where all gold and foreign exchange reserves were transferred to.

The bank made significant attempts at moving away from becoming a commercial bank towards becoming a central bank between 1920 and 1944- the era of governing by Montagu Norman. In 1946, only two years after Norman left, the bank became the national bank of England.

As England's national bank, it carried the responsibility of issuing currency in banknote form. The issuing of currency was backed by the countries gold reserves and banknotes of 100 Pounds were traded for the equivalent value of gold. It became more convenient to carry around notes as opposed to bars of gold.

The gold in the reserves sat around getting older as barely anyone asked for gold anymore. Eventually this turned into a business where goldsmiths started to lend out money against their possessed gold making profits off interest of the loans. This idea of "reserve banking became profitable as long as people paid back their loans and not everybody asked for their gold back simultaneously.

The bank of England, not wanting to miss this profitable opportunity, began to implement the same strategy as the jewlers only on a larger scale, mainly issuing loans to the government occasionally for 10 times the amount of gold it possessed. The government could secure its loans with tax payments to be made at a later date. More gold in the reserves meant more loans could be written so the government initiated a plan of Mercantilism which allowed the reserves to stockpile large amounts of gold so that it could borrow even more.

The bank was given another power in 1997 when it was given permission to set interest rates. This was formerly done by the cabinet. Surveillance over the actions of the bank was transferred to the Securities and Investments Board.

The following are the prominent functions of the Bank

The bank of England performs all functions a central bank needs to perform. These include maintaining stability of price in addition to supporting all economic policies of the Queen's government to facilitate economic growth in accordance with the Bank of England act of 1998.

The bank of England has two central goals in order to maintain a consistent and effective framework in finance.

Firstly there is Monetary Stability. This important goal is aimed at keeping prices stable thus maintaining confidence in the currency. The government's inflation target amount define what is and isn't a stable price. The bank attempts to adhere to the inflation target via the level of interest rate which is decided by the Monetary Policy committee.

The second central goal is financial stability. This involves finding and eliminating any threat posed to the financial system all together. The bank's surveillance and intelligence functions are aimed at discovering these threatening elements. Any threat can be reduced through financial executions, locally or internationally. The bank can even act as its own lender in extreme last resort situations.

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