History of Bank of England

England's crushing defeat by France, the dominant naval power, in naval engagements culminating in the 1690 Battle of Beachy Head, became the catalyst to England rebuilding itself as a global power. England had no choice but to build a powerful navy if it was to regain global power. As there were no public funds available, in 1694 a private institution, the Bank of England, was set up to supply money to the King. £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 started to transform the economy, from iron works making nails to agriculture feeding the quadrupled strength of the Royal Navy. This helped the new United Kingdom – England and Scotland were formally united in 1707 – to become prosperous and powerful. Together with the power of the navy, this made Britain the dominant world power in the late eighteenth and early nineteenth centuries.

The establishment of the bank was devised by Charles Montagu, 1st Earl of Halifax, in 1694, to the plan which had been proposed by William Paterson three years before, but had not been acted upon. 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 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 1994. The charter was renewed in 1742, 1764, and 1781.

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

The Bank's original home was in Walbrook in the City of London, where during the building's reconstruction in 1954 archaeologists found the remains of a Roman temple to Mithras (Mithras was – rather fittingly – worshipped as being the God of Contracts); the Mithraeum ruins are perhaps the most famous of all twentieth-century Roman discoveries in the City of London and can now be viewed by the public.

8th century

In 1734 the Bank of England moved to its current location on Threadneedle Street, and thereafter slowly acquired neighbouring 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 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. 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 the government prohibited the Bank from paying out in gold. This prohibition lasted until 1821.

19th century

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.

20th century

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 1997 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 fromcommercial banking and become a central bank. In 1946, shortly after the end of Norman's tenure, the bank was nationalised by the Labour government.

The main Bank of England façade, c. 1980.

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.

In 1977, the Bank set up a wholly owned subsidiary called Bank Of England Nominees Limited (BOEN), a private limited company, with 2 of its 100 £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. Historically, BOEN was a vehicle for Governments and Heads of State to (subject to approval from the Secretary of State) invest in UK companies, exempt from the usual disclosure requirements, providing they undertook "not to influence the affairs of the company". BOEN is nowadays a dormant company with assets less than £1 million and is "no longer exempt from company law disclosure requirements". BOEN has 2 shareholders: the Bank of England, and the Secretary of the Bank of England.

Tercentenary of the Bank of England, commemorated on a 1994 British two pound coin.

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 of England would be granted operational independence over monetary policy. Under the terms of the Bank of England Act 1998 (which came into force on 1 June 1998), the bank'sMonetary Policy Committee was given sole responsibility for setting interest rates to meet the Government's stated Retail Prices Index (RPI) inflation target of 2.5%. The target has now changed to 2% since the Consumer Price Index (CPI) replaced the Retail Prices Index as the treasury's inflation index. 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.

The handing over of monetary policy to the Bank of England had featured as a key plank of theLiberal Democrats' economic policy since the 1992 general election. A Conservative MPNicholas 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.

21st century

More recently, in 2007 the Bank of England, in its role as lender of last resort, helped support 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 crisis. The role of supporting Northern Rock, and other UK banks caught up in the late 2000s financial crisis, is now performed by UK Financial Investments Limited, set up by the UK Government. The Bank of England of course still remains lender of last resort in the case of any further unexpected shock to the UK financial system.