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. No public funds were available, and the credit of William III's government was so low in London that it was impossible for it to borrow the £1,200,000 (at 8 per cent) that the government wanted.
In order to induce subscription to the loan, the subscribers were to be incorporated by the name of the Governor and Company of the Bank of England. The bank was given exclusive possession of the government's balances, and was the only limited-liability corporation allowed to issue bank-notes.[12] The lenders would give the government cash (bullion) and also issue notes against the government bonds, which can be lent again. The £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, from establishing iron-works to make more nails to agriculture feeding the quadrupled strength of the Royal Navy, started to transform the economy. This helped the new United Kingdom – England and Scotland were formally united in 1707 – to become powerful. The power of the navy made Britain the dominant world power in the late eighteenth and early nineteenth centuries.[13]
The establishment of the bank was devised by Charles Montagu, 1st Earl of Halifax, in 1694, to the plan which had been proposed byWilliam Paterson three years before, but had not been acted upon.[14] 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.[15] 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 £4,000 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.
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.
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.
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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.
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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 1998, 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.
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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.[16]
In 1977, the Bank set up a wholly owned subsidiary called Bank of England Nominees Limited (BOEN), a private limited company, with two of its hundred £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. BOEN is a vehicle for governments and heads of state to (subject to approval from the Secretary of State) invest in UK companies, providing they undertake "not to influence the affairs of the company".[17][18] BOEN is no longer exempt from company law disclosure requirements.[19]Although a dormant company,[20] dormancy does not preclude a company actively operating as a nominee shareholder.[21] BOEN has two shareholders: the Bank of England, and the Secretary of the Bank of England.[22]
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's Monetary 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%.[23] The target has now changed to 2% since the Consumer Price Index (CPI) replaced the Retail Prices Index as the treasury's inflation index.[24] 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 the Liberal Democrats' economic policy since the 1992 general election.[25] 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.
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