The Bank of England is a comparatively modern institution when held against other national banks such as the Bank of Geneva (founded in 1345) or the Bank of Venice (founded in 1157). It was originally conceived by a merchant by the name of William Patterson in 1689 and was incorporated by William the 3rd in 1694 with established capital of £1.2m which was lent to the UK Government at eight per cent interest and a pre-agreed £4000 for ‘management services’.
Despite being seen as a ‘lender of last resort’ in today’s economy, the bank actually fell into difficulties only two years after incorporation, at one point having it’s notes marked down by 20% against face value. Government, no different than today, came to the rescue, injecting the bank with fresh capital and taking its total capitalisation to £2.2m.
Over the following centuries, various parliamentary acts further increased this sum, establishing the Bank in the minds of the masses as a kind of monopoly figure – so much so, that when the Bank became more successful and competitors began to enter the market, another Act of Parliament was passed which prohibited any partnership of more than six people from issuing ‘bills of exchange, promissory notes, etc. for a period of less than six months’.
The first charter of the Bank in 1694 was for eleven years and was prolonged in 1697 – as you might guess, this was repeated over and over until 1946 when the Government nationalised the bank due to its ‘central importance’ to the UK’s economy. This was later partly reverse in 1997 as the Government granted the bank a measure of independence and a mandate to maintain monetary and financial stability which including control of UK interest rates, money supply and a target of keeping inflation stable at 2%.
Today, the Bank is governed by a ‘Court of Directors’ which consists of five full-time members (a governor and four deputy governors), and seven non-executive directors. Although the bank is notionally a public body, it no longer receives public funding and instead generates funds by mandating that all UK banks have to deposit a certain level of cash with them on which they earn a return, charging regulatory fees and penalties to UK financial firms, charging for the cost of issuing and replacing bank notes, and – of course investing the capital accrued over its 300+ years of existence.
The Bank is also the custodian of the UK’s official gold reserves and its vault in the City of London holds around 400,000 bars of golds and requires keys that are three feet long to open. As you might guess, the Bank is also responsible for maintaining ‘confidence in the UK currency’ which includes printing and ensuring the integrity of the money supply (identifying and eliminating fake notes and coins).
In 2008 (a rather scary 12 years ago), the bank acted quickly and decisively in the face of the global recession, slashing interest rates from 5% to 0.5% and announcing a £200bn programme of ‘Quantitative Easing’ (QE) in 2009, a further £375bn in 2012, and an additional £435bn in 2016. The theory behind QE is a simply one. The Bank purchases huge quantities of UK Government bonds which drive the price of the bonds up and the yield down due to the extra demand. This, in turn, forces down interest rates on loans (mortgages and business loans), which tend to follow the yield of Government debt. In effect, this makes it ‘cheaper’ to borrow money, encouraging households and business to increase spending and decrease saving.
Unfortunately, this has also had the adverse effect of inflating not only bond prices but also stock and house prices as companies and individuals have been flooding with cheap and easy money with which to invest and speculate on assets. Interestingly, the official UK statistics are recording record low inflation – about 2% a year or lower for over ten years but something there doesn’t stack up to me.
The basket of goods which the Bank uses to determine inflation supposedly include 180,000 prices of over 700 individual items – everything from the price of a pint of milk to the price of a season football ticket – to build a picture of how prices are changing over time.
But what happens if you build a personalised basket?
Well, according to official statistics, phone charges have increased 71% since 2010. The price of electricity has increased 48%, a bottle of wine has increased 31%, a non-hardcover book has increased 28%, a bag of crisps, 27%, the price of a cup of coffee, 26%, and a can of sweetcorn is up 23%.
That doesn’t quite sound like 2% a year to me…
Of course, those items are not the only things which I purchase – probably the most regular and certain is my weekly food shop, so I was interested to note that a general basket of food items – most fruit and vegetables certainly – has actually barely moved since 2010, although I strongly suspect the cost of providing that food (fuel, labour, taxes etc.) has increased dramatically over the same period, likely eliminating choice and consolidating the market in a few massive, multi-national corporations at the expense of local variety and jobs.
What is my point? Well, I believe that the Bank of England is forcing up prices of every day consumer goods and services through its programme of QE and likely doing serious damage to our economy at the same time.
Considering the Bank’s primary charter to ‘promote the public Good and Benefit of our People’ – I wonder whether they have their priorities set quite straight…