By Richard Greaves
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 (ie 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.