Central banking is still a relatively new phenomenon, at least from a historical perspective. The first central bank, The Riksbank in Sweden, only dates back to the 17th century. The second central bank—and the one from which most modern central banks are based—is the Bank of England, founded shortly after William and Mary assumed the throne of England just before the dawn of the 18th century.
The Bank of England has an interesting history and, in many ways, served as the canary in the coal mine for central banks until the 20th century. In recent years, Bank of England’s policy has been questioned by bankers, policy analysts, and investors.
Early History as a Private Bank
After a series of bloody conflicts, the English Crown found itself in a ruinous financial state. Charles II borrowed heavily from London bankers in the mid- to-late 17th century, repaying little and destroying much credibility along the way.
When William III ascended, he schemed with a Scot, William Patterson, to create the monopolistic Tunnage Bank in 1694 (so called because the founding of the bank was snuck into a minor declaration of the Tunnage Act of 1694). The Crown created £1,200,000 in credit to open the bank, allowing it to issue notes.
Though technically a private institution, the Tunnage Bank received heavy restrictions from the English government. In traditional English form, the Crown granted the bank monopolistic privilege to serve without competition for the government’s business. Two years later, the Tunnage Bank went bankrupt. In response, the Crown made it even more difficult for other lenders to compete, ultimately driving out many small banks in London. In response, surviving small banks deposited their funds with the renewed Bank of England.
In 1844, Parliament passed the Peel Act. This Act granted absolute monopoly of all bank notes (paper currency) in England to the Bank of England (previously, as had been standard throughout the world, private banks issued competing notes in England). Such notes were pyramided through fractional loans and were originally redeemable in gold, a model that nearly every modern country would adopt, concluding with the Federal Reserve Act of 1913 in the United States.
Interesting Role in the Crash of 1929
The period between 1914 and 1945 was very tumultuous for the once hegemonic British Empire. Two world wars and a major depression sapped the nation’s resources, and former colonies continued to rebel against their English overlords.
In 1914, the English government declared that all Bank of England notes were legal tender, effectively leaving room for a suspension or abandonment of the gold standard. In 1925, the Bank of England suspended all payments and loans to the government. Six years later, the country left the gold standard even though the Bank of France and the New York Fed loaned the Bank of England $250 million to prevent such an event.
The Bank of England had always coordinated closely with banks in Germany, France, and the rest of Europe. The banks lended to each other and tried to fix exchange and interest rates such that international trade and debt monetization could be arranged according to politician’s needs. Yet, the most meaningful bond was of that between the Federal Reserve’s New York Bank (headed by Benjamin Strong) and the Bank of England.
The Bank of England wanted to inflate away its debts from WWI, but it feared that account holders would just shift their deposits to the United States to avoid the inflation. To accommodate, the Federal Reserve decided it could afford to inflate the U.S. dollar concurrently. This meant the exchange rate between British pounds sterling and the U.S. dollar would remain relatively stable, preventing capital flight from the UK.
Throughout the 1920s, the Federal Reserve pursued a renewed inflationary policy. Thanks to unprecedented asset appreciation and a relatively productive economy, much of this inflation went unnoticed. Unfortunately, much of that new paper ended up financing margin accounts on public exchanges, fueling a gigantic stock market bubble that burst in October, 1929.
Bank of England Nationalization by the UK Government
In 1946, shortly after the conclusion of WWII (and the same year as the Bretton Woods Agreement), the government of England took over the Bank of England. All private stockholders lost their interest in the Bank and, along with it, the power to appoint Governors, Directors, or issue directives. Politicians have run the bank ever since.
Fifty-one years later, the government of England transferred all monetary authority to the Bank of England. Some of these functions have since transferred to the Financial Services Authority (FSA).
The Bank of England operates similarly to the Federal Reserve in many respects. The Bank’s committee votes on whether to raise or lower prime interest rates, to purchase bonds from the UK government or from connected corporations, or to change banking regulations.
Between 2007 and 2017, the Bank of England has kept interest rates at historic lows and purchased record numbers of bonds from the government and from corporations.
In the UK, as in the US, many expect such monetary policy to fuel future inflation and perhaps even blow up asset bubbles in bonds, stocks, and/or real estate.
Although the information in this commentary has been obtained from sources believed to be reliable, American Bullion does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice. American Bullion will not be liable for any errors or omissions in this information nor for the availability of this information. All content provided on this blog is for informational purposes only and should not be used to make buy or sell decisions for any type of precious metals.