The Bank of England

How the Bank of England was founded in 1694 to fund war, how it became a model central bank, and how it gained independence in 1997.

The Bank of England, founded in 1694, is one of the world’s oldest central banks.

Origins

It was created to lend money to the government of King William III for war with France, in exchange for privileges like issuing banknotes.

Becoming a central bank

It gradually became the government’s banker and the bankers’ bank.
Writer Walter Bagehot, in Lombard Street (1873), argued it should act as lender of last resort in crises: lend freely against good collateral at a high rate.

The gold standard

Britain led the gold standard in the 19th century, with the pound central to world finance.

Nationalisation

The Bank was nationalised in 1946.

Independence

In 1997, the Labour government gave the Bank operational independence to set interest rates, with an inflation target, now 2 percent, set by the government.

Monetary Policy Committee

A nine-member MPC votes on interest rates, with published minutes, a model copied by other countries, including India’s own MPC (2016).

The lender of last resort

During a banking panic, the Bank of England lends to solvent banks against good collateral, preventing a chain of failures, as Bagehot recommended.

Thinking central banks were always independent

The Bank of England gained operational independence only in 1997.

Key takeaways

The Bank of England was founded in 1694 to fund war.
Bagehot defined the lender of last resort role.
It was nationalised in 1946 and made independent in 1997.
Its MPC model influenced India's.