This page can be read with footnotes at The Great Depression of 2009: Who is to Blame? about the function and critique of the Bank of England is excellent reading for anybody who might ask themselves: “why is there so much money for bailing out the financial economy but never enough for health, education, environment and small businesses?”
The Bank of England by Philip Geddes
‘Nothing would persuade the English people to abolish the Bank of England; and if some calamity swept it away, generations must elapse before at all the same trust would be placed in any other equivalent.’ That was the verdict of the Victorian political economist Walter Bagehot in Lombard Street, his famous book on banking published in 1873.
When Bagehot wrote his book, the Bank had been in existence for almost two centuries, and had become the pillar of the British financial system. As he put it, ‘on the wisdom of the directors of that one joint stock company, it depends whether England shall be solvent or insolvent’. Today , more than a century later, the Bank is no longer a privately owned joint-stock company, but a publicly owned arm of government . Its influence is, if anything, greater and more pervasive than it was a century ago.
Yet the bank is one of the least-known institutions in Britain and has taken great pains to remain so. The attitude was well summed up by a member of the Bank’s inner cabinet, the Committee of Treasury, who wrote to the Governor of the Bank in 1894 that it was ‘wholly beneath the dignity of the Court that any of its members should be influenced by the ignorant comments of the Press. It would scarcely be more indecorous if they themselves were to influence such comments.’ It was not until 1941 that the Bank appointed, with extreme reluctance, an ‘Advisor’ on dealing with the Press . Montagu Norman , loathed the Press, and took immense pains to avoid journalists. His view of the Bank’s operations, as he put it to his colleagues, was ‘never explain, never excuse’.
For many years the Bank has been accustomed to being master in its own house; doing what it felt was needed in the economic life of the nation untrammelled by legal limitations or statutory restrictions. It has always preferred to operate in a quiet and informal way, and such methods of working require freedom from the spotlight of public interest. So the Bank has fought off assaults on its operational and practical independence – some from the Treasury, its nominal master, but mainly from Parliament, which has struggled in vain to make this least-public of publicly owned institutions more accountable to its proprietors. And while almost every other institution in British life – even, to some extent, the monarchy – has opened itself to the all-pervasive eye of the television camera over the last few years, the Bank has resisted such intrusions.
For most people, the Bank is just the place where they make banknotes and intervene to protect sterling against speculation. Although these are two of the Bank’s most publicly visible jobs, the range of its work is much wider. At the heart of its job is the management of the money and foreign-exchange markets. This involves influencing interest rates and the foreign-exchange rate. In addition the Bank is the legally appointed guardian of the banking system: it supervises and licenses anyone wishing to set up in business as a bank in the United Kingdom.
The Bank is also a key part of the process of economic policy formulation in Britain; it advises the Treasury on economic matters and executes key aspects of policy. This arises out of one of its traditional functions, as banker to the Government. It keeps the Government’s bank accounts and manages both the funding and the administration of the national debt. And there are other jobs the Bank undertakes, none of which has anything to do with its statutory duties or its role as the Government’s banker: it exercises informal supervision over the City of London and the financial sector as a whole, and does not hesitate to intervene in the affairs of the City when it feels that intervention is required.
On top of that, it has also taken on a role in managing the rescue of ailing industrial companies. It was also the Bank that pushed the [London] Stock Exchange into accepting that deregulation was necessary; it is the Bank that has quietly orchestrated the upheavals in the structure of the City that have followed. In so doing the Bank has taken an enormous risk: it has made a heavy investment of its prestige and authority in the hope that Big Bang will be good for Britain. If the City fails to meet that challenge the Bank will carry the blame for encouraging it in the first place.