Timeline (4)
The nineteenth century - banker to the banks
The 1844 Act gave the Bank the note issue, and the nation a
sound currency. But it placed, in effect, a limitation on the
Bank's ability to develop its commercial business, and during
the nineteenth century it was overtaken in size by the great
joint-stock deposit banks which emerged from a series of amalgamations.
The Bank chose not to compete directly with these joint-stock,
or clearing banks, but to develop its role as the central bank:
the guardian of the gold reserve, the supplier of liquidity
of last resort. In a succession of banking crises - notably
those involving Overend and Gurney in 1866 and Barings in 1890
- the Bank established the concept of lender of last resort
- the ultimate reserve of the banking system. When the need
arose, it would mobilise its own resources - and those of the
City - when a financial crisis at a single bank threatened to
spill over into the financial system as a whole. And it would
routinely use this leverage over the banking system's liquidity
- the ability to supply money to the banks when no-one else
could - to set interest rates in London at what it judged to
be the right level. While the gold standard was in place the
choice of interest rate was constrained - the Bank had to set
rates high enough to maintain its gold holdings. Later the choice
of rate would become more a matter of discretion. Thus the two
main elements of modern central banking were in place.
The twentieth century - the gold standard abandoned
The First World War saw the link with gold broken again, and
other increase in the issue of unbacked or fiduciary currency.
(On this occasion the low denomination notes were issued by
the Treasury rather than by the Bank.) After the war, in 1925,
an attempt was made to return to the discipline of the gold
standard, but this proved unsustainable and the gold standard
was finally abandoned in 1931. The gold and foreign exchange
reserves were transferred to the Treasury (although they are
still managed by the Bank) and the note issue became entirely
fiduciary. Now the only official constraint on the issue of
notes is the need to obtain a Parliamentary resolution approving
an increase in the fiduciary issue.
