The Bank of England's Monetary Policy

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As the second oldest and perhaps the most renowned central bank, the Bank of England could provide some important insights into issues that may confront the Federal Reserve System in the future. The next section provides a brief review of the Bank's history, while the second section discusses its current procedures. A brief conclusion follows.

A Brief History of the Bank of England

The Bank of England was chartered as a joint stock company in 1694 in return for a loan of [pound sterling]1.2 million to the government. In addition to its commercial activities, it was expected to handle the government's accounts and to assist with its funding. Although the Bank immediately began issuing notes, not until 1709 did it achieve a virtual monopoly in note issuance. Eventually, the Bank both provided settlement services between banks and assumed responsibility for the stability of the banking system as a whole by acting as the lender of last resort.

At the beginning of the nineteenth century a rise in gold prices sparked a serious debate over the Bank's purpose. Participants were divided into two camps: the currency school and the banking school. The currency school argued that for currency stabilization, currency issuance should be strictly tied to gold deposits. The banking school countered that monetary and macro stability depended on all of the Bank's liabilities, not just notes. Vestiges of this debate can still be seen in the accounting structure of the Bank; by the Bank Charter Act of 1844, the Bank was, and still is, separated into two departments with their own balance sheets. The role of the note issuance department was to ensure that the currency was fully backed, while the banking department was expected to carry on as a normal commercial bank, with its own separate balance sheet. Thus, given the responsibilities of the Bank at the time, its assets consisted of specie, government debt, and bank bills.

De facto, the spirit of the Act was repealed almost immediately. A consensus soon arose that …