[A-List] Shedding Some Light on the Bank of England

Fri Sep 17 02:34:36 MDT 2010

by Richard Greaves

Prosperity (January 2005)

There is no great mystery today surrounding the Bank of England - its
annual report, which anyone can obtain, contains full sets of accounts
and is quite clear and explicit about its composition and functions
which, incidentally, have changed substantially since its formation
back in 1694.

In its early days it lent to British overseas enterprises such as the
East India Company and the Hudson's Bay Company - as well as slave
traders, all of which brought in big profits to both the bank and the
entrepreneurs concerned.

As the government's banker it also profited by lending to government to
finance a series of costly wars during the eighteenth century.

National debt increased dramatically as a result, and taxation went up
to pay the interest.

However by the mid-nineteenth century, as well as being the
government's sole banker, the Bank of England had become the bankers'
bank. It only made loans to government and to commercial banks. It held
the nation's gold reserves and regulated the flow of money in the form
of the bank notes - still theoretically redeemable for gold at this
time.

Today, operating as it does as the bankers' bank, it is to the
commercial banks (that is, the High Street banks) what the commercial
banks are to the public.

Just as we may deposit money with commercial banks, so commercial banks
in turn keep deposits with the Bank of England. The amount of cash that
a commercial bank can buy up from the Bank of England to meet its
customers' cash withdrawals is limited to the amount of deposits it has
in its account at the Bank of England and/or what it can borrow from
the Bank of England or from other banks.

Commercial banks borrow from the Bank of England in exactly the same
way that individuals and businesses borrow from commercial banks.

Nationalising the Bank of England in 1946, which might seem at first
sight to be a far reaching measure, made little difference in practice.

Yet, the state did acquire all the shares in the Bank of England - they
now belong to the Treasury and are held in trust by the Treasury
Solicitor.

However, the government had no money to pay for the shares, so instead
of receiving money for their shares, the shareholders were issued with
government stocks. Although the state now received the operating
profits of the bank, this was offset by the fact that the government
now had to pay interest on the new stocks it had issued to pay for the
shares.

However, it is much more significant to note that whilst the Bank of
England is now state-owned the fact is that our money supply is once
again almost entirely in private hands, with 97% of it being in the
form of interest bearing loans of one sort or another, created by
private commercial banks.

Indeed this is now where the real power resides - with commercial
banking.

The Bank of England is now essentially a regulatory body that supports
and oversees the existing system. It is sometimes referred to as "the
lender of last resort" in so far as one of its functions as the
bankers' bank is to support any bank or financial institution that gets
into difficulties and suffers a run on its liquid assets. In these
circumstances, it is not obliged to disclose details of any such
measures, the reason being so as to avoid a crisis in confidence -
confidence being something on which the current system is very
dependant.

However beyond that, it is no longer a major player in the
lending/money creation market. Its annual accounts reveal that its
loans and profits are only a fraction of those of a major commercial
bank such as Barclays, and it only holds a very small amount of
government stocks, so it is no longer really lending to government
either - that function has largely passed to the merchant banks.

Most of its profits come from what is known as the "issue department" -
the department of the bank which is responsible for printing and
distributing bank notes and coins. These are purchased by the High
Street banks to meet their customers' demands for cash and the various
banks have their accounts at the Bank of England debited accordingly.
Basically, the profits from this operation belong to the state and are
transferred to the Treasury, thus being added to the public purse.

Nevertheless, although owned by the state, the bank is largely
controlled and run by those from the world of commercial banking and
conventional economics. The members of the Court of Directors, who set
policy and oversee its functions, are drawn almost entirely from the
world of banks, insurance, economists and big business.

On the other hand, the responsibility for setting interest rates and
controlling money supply has always remained with bankers and
economists through the Monetary Policy Committee headed by the Governor
and the two Deputy Governors.

The day to day management and running of the bank is in the hands of a
team of professional managers headed by the Governor, the Deputy
Governors and four Executive Directors.

>From 1946 to 1997 many decisions, especially those relating to interest
rates, were made jointly by the Treasury and the Bank, but of course
Treasury officials and the Chancellor of the Exchequer and other
treasury ministers frequently have close ties with the world of
commercial banking. Since May 1997, the Bank's Monetary Policy
Committee has had exclusive control over setting interest rates -
although it still takes into account government inflation targets in
reaching its decisions.

It can be noted that the formal removal of the Treasury from this
decision making process was an essential step prior to incorporating
the Bank of England into the European System of Central Banks under the
control of the European Central Bank - which is what would happen
should Britain enter Economic and Monetary Union and replace the Pound
with the Euro.

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