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The History And Functions Of The Bank Of England

Jul 12, 2008
The Bank of England is a historical entity that instead as acting as a bank for private investments has a role to support the finances of the nation and to keep the economy afloat. The bank was founded in 1694 in order to manage the debt of the British Government. Whilst it has continued to perform this role, its functions have expanded, one of these being helping the government formulate its monetary policy. The bank also has complete control over the issuing of banknotes in England and Wales.

The Bank of England has a variety of functions that many central banks all over the world carry out. In terms of importance; keeping prices stable and supporting the policies of the government that relate to finances is the predominant pair. It is hoped by carrying out these roles the bank can help to promote the growth of the UK economy.

Monetary stability can be defined as having stable prices and overall a confidence in the national currency. The bank does this by trying to ensure that any price increases meet the inflation targets set by the government. This task is carried out by making minute adjustments to the interest rate; these minor alterations are decided by the Monetary Policy Committee.

As an adjunct to this, maintaining financial stability is also a key role of the national bank. This is done by protecting the economy from any threats that may unsettle the financial situation. As a result, the bank must employ workers to investigate potential threats in the stock and other financial markets such as oil. While the bank attempts to be proactive with preventing financial instability, as a last resort a reactive approach can be taken; this normally takes the form of a loan to the government in extreme circumstances.

Loans to the government are in no way new to the bank of England. The National Debt has been held by the bank for centuries, managing the payments from the government and to other banks. The bank also had control over the gold reserves of the country although throughout the eighteenth and nineteenth century, limitations were placed upon the dispersal of the gold.

In 1844 the bank was given sole control over the issuing of banknotes. These notes had to be tied to the gold reserves as security. Other banks however were still able to issue there own notes, especially those outside of London. These note producing banks however were still in operation right up until the thirties. The bank however still does not control the complete issuing of notes across the whole of Britain. Scotland and Ireland retain the right to produce their own notes.

In the early to mid twentieth century the bank made a drive to reduce its commercial activities in pursuit of becoming a solely central bank. After the Second World War it was nationalised and remains government owned today. In addition, in the latter stages of the last century, the bank was given control over the setting of interest rates. This however means that the bank is solely responsible for interest rates, if they do not meet the government targets; the governor of the bank must explain to the government and show how the situation will be remedied.

The Bank of England has been heavily involved in the political and economic development of the nation. The bank has evolved with developments and enhanced its role at the centre of the national financial situation. Today its role is as important as it has ever been, supporting the government in its monetary decisions is a fundamental function that maintains the stability of the economy.
About the Author
Financial expert Thomas Pretty looks into the history of our national bank and how it has helped developments in the political and economic sphere.
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