Yesterday was the Bank of England’s 321st birthday.  Created on 27th July 1694, the Bank – as it’s referred to in shortened form – is one of the oldest Central Banks in the world.  It is not the oldest though.  That accolade falls to the Central Bank of Sweden, the Riksbank, created in 1668, although it was preceded by the foundation of the modern Central Bank system in Amsterdam, where the Bank of Amsterdam was formed in 1609.

The original role of the Banks were to overcome the insecurities of transacting with other cities and nations.  This method had been pioneered by the Knights Templar, but the formal opening of Central Banks meant that new forms of currency could be trusted because they were backed by cities or nations.

Before the Central Banks opened, clipped and worn foreign currencies were seen as being untrustworthy, as they would lower the value of national and local currencies.  This meant that foreign currencies were often just melted or not accepted. 

The Bank of Amsterdam overcame this situation by accepting overseas currencies at their full value and, for a nominal fee, crediting that value to your account.  This credit was then known as bank money and, as it always kept its value at the level of credit given, was seen as being of more value than general coinage.  Hence, bank money became the unit of currency for higher billings.  In fact, a regulation was introduced in Amsterdam that all high value transactions must be paid in bank money, and this became the currency that merchants sought for payment as a result.  In other words, it was the most trusted form of payment because it was secured by the City of Amsterdam or, in latter cases, the Royal Charter of the King or Queen of the Nation.

Intriguingly, during this period, many Central Banks were not owned by the Monarchy or Government, but were private limited liability institutions.  This was key, as most Royal Houses were broke, due to wars between nations.  For example, in 1690 after a crushing defeat by the French, the English Parliament needed to find £1.2 million to rebuild the Navy, but there was no public funding available.  As a result, the Government had to look for private funding, but that would be difficult as there was no major funding available through a single private source. 

Charles Montagu, the 1st Earl of Halifax, proposed that a loan of £1.2 million be made to the Government by creating a private institution, backed by Royal Charter and 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 1694, through the passage of the Tonnage Act.

Why would the rich Lords of England contribute to such a new company? 8 percent interest rates and a management fee of £4,000 per annum helped, especially as the Government would be indebted to them, and so the Bank of England became a new method of issuing and sourcing funds.

This method has since been copied worldwide.  Central banks were established in many European countries during the 19th century with the Banque de France created in 1800, following the fall of the monarchy and the Napoleonic wars with the UK, Russia and Austria and more.

The US Federal Reserve was created by the U.S. Congress through the passing of The Federal Reserve Act in 1913; Australia established its first Central Bank in 1920; Colombia in 1923; Mexico and Chile in 1925; and Canada and New Zealand in the aftermath of the Great Depression in 1934. The People's Bank of China evolved its role as a Central Bank starting in about 1979 with the introduction of market reforms, which accelerated in 1989 when the country adopted a generally capitalist approach to its export economy; and now we have the ECB, the European Central Bank, to consolidate the interests of a European Monetary Union through the Single Supervisory Mechanism.

What is interesting through all of these developments is the role of the Central Bank, and whether it should be publicly or privately owned.  Most Central Banks act as Government tools to control the economy, and are run by their Treasury departments, but it has not always been this way.

For example, as mentioned, the Bank of England began as a private institution and was only nationalised after the Second World War, when Britain’s war debt was so large that controlling the economy had to return to Government ownership.  Bearing in mind that the Bank was created due to war debt in the 1600s, war was the reason for much of Britain’s National Debt.  For example, at the end of the Napoleonic Wars in 1815, British Government debt had reached a peak of more than 200% of GDP and it did so again at the end of the Second World War (WW2).  By the end of WW2, Britain had an immense debt of £21 billion, and most of this was held in foreign hands mainly to creditors in the United States.  In 1945 Britain took a loan for $586 million and a further $3.7 billion line of credit. The debt was to be paid off in 50 annual repayments commencing in 1950 with the final loan only paid off in December 2006.

Again, intriguingly during this time, the Bank was closely controlled by Government until 1997, when Gordon Brown gave them their independence once more.  However, that independence was purely in setting interest rates through the Monetary Policy Committee and the Bank is still closely aligned with Government interests, as demonstrated by the appointment of Mark Carney by George Osborne.

The debate about whether Central Banks should be Government run or private institutions also rages worldwide, with the Federal Reserve being one of the most hotly contested discussions.  For example, a fascinating book The Creature from Jekyll Island shows how Central Banks work by detailing the private ownership of the Federal Reserve by the US Banks.  The title refers to the formation of the Federal Reserve System, which occurred at a secret meeting at Jekyll Island, Georgia in 1910. It was at this meeting where the richest and most powerful bankers at the time, along with a U.S. Senator, wrote the proposal to launch the Federal Reserve System to control the financial system.  The meeting included the Rothschild’s who, as a result, are sometimes referred to as the Fed’s owners.

This is incorrect but, in an interesting article by Anthony Migchels, he points to an interesting aspect of public versus private ownership:

It matters not whether money is managed privately or publicly. What matters is whether we have stable and cheap (interest-free) money. If a private interest-free mutual credit facility can provide it, grand. If Government can do it, fine. A mixture of both is probably the way forward.  Central banks are a mixture of both: they have public and private aspects … Central banks are staffed by Goldman Sachs alumni.  They keep competition out of the market. They prop up busted banks, maintaining some kind of 'stability'. They oversee private usurious credit creation and maintain the banks' ability to rake in trillions per year in interest. They allow the banks to create the boom/bust cycle.

In other words, Central Banks are the pivotal point between Government and the rich.  That is why they are there to regulate the corrupt or illegal activities with money, whilst also trying to ensure economic stability and prosperity for all.  That is why the Bank deals with many big ticket items today, as illustrated by this short list of headlines from the Telegraph:

• Forex traders have been shocked into behaving themselves but it might not last, says BoE director
• Wheatley "disappointed" at being ousted from the FCA
• Pound jumps as BoE warns on inflation risk
• The move to cut depositor protection from £85,000 to £75,000 took some banks by surprise
• Raheem Sterling won’t be the new face of the £20 note. But who will be?
• The Bank of England is happy with banks, and is now worried about the rest of the financial system
• Iran's oil could help Mark Carney win interest rates battle
• In a major monetary policy speech at Lincoln Cathedral, the Governor gave the strongest indication to date that interest rates could rise as early as the turn of the year
• Pound jumps after Carney says interest rate rise moving closer
• Bank of England plans to accept equities as collateral from banks
• Officials could let banks offer shares to the BoE in return for funding
• Resurgent UK households and firms borrow more
• BoE faces long wait for Mark Carney’s vital statistics

I wish the Bank Happy Birthday for yesterday and leave you with a final piece of trivia.

Why is the Bank called the Old Lady of Threadneedle Street?

The Bank moved to Threadneedle Street in 1734 and the nickname The Old Lady of Threadneedle Street can be attributed to a cartoon published in 1797 by James Gillray (doubleclick image to see a larger version).