A birthday present for the Bank of England?

Today is the 62nd anniversary of the nationalisation of the Bank of England. The Bank was originally established in 1694 to raise money for the government. It gained its first Royal Charter on 26 July 1694, and moved to its Threadneedle Street address in 1734. It gained a monopoly over note issue in 1844 and ran the gold and foreign exchange reserves. In 1870 it took on responsibility for interest rate policy.

In 1946 an earlier Labour government, just like the present one, was in the bank nationalisation business. Unlike the present one, it carried it out with greater simplicity and style.

The legislation was just three pages long, comprising four main clauses, one clause setting out the short title and one giving a couple of definitions. The Bill told us they were nationalising juts the one bank, the Bank of England. It set out exactly how much compensation shareholders would receive, and told them they would be paid in 3% government bonds. The Bank of England was given a wide ranging power to request information, give advice and to direct any other bank. The government was given a wide ranging power to direct the Bank of England after consultation with the Governor. After proper debate this Bill was passed into law by the large Labour majority. Job done.

What a contrast this makes with the measure to nationalise Northern Rock. That Bill was seventeen pages long. It was convoluted, making it difficult to understand what it was saying owing to the technical and inelegant drafting. It did not mention Northern Rock, said nothing about how much compensation would be offered to shareholders, and left practically every important detail about Rock nationalisation to a later Order to be laid under the legislation. Insufficient time was given to debate it. The only similarity to 1946 was the use of a large Labour majority to push it through, swelled in 2008 by eager Liberal Democrats who also like burdening the taxpayer with more liabilities.

One of the ironies of the situation was the Bank of England’s position in the events leading to the planned nationalisation of Northern Rock. By 2007 the Bank of England had grown to become a bank with a balance sheet of around £40 billion. That is a lot of money to most of us, but is tiny in relation to modern banks and governments. When the Bank of England started its rescue for Northern Rock it must have become clear that trying to offer substantial sums for a bank with £110 billion of liabilities from the balance sheet of one under 40% of its size was going to stretch things badly. Treasury backing for its wholly owned subsidiary, the Bank of England, was needed to mount the rescue. The Northern Rock action still required substantial changes to the shape of the Bank of England’s balance sheet.

Should we wish the Old Lady of Threadneedle Street a happy birthday today? I feel sorry for her. She has been much damaged by the removal of her former role to raise money for the government from the lending markets, and by the removal of her role as day to day banking supervisor. This left the bank without the same level of knowledge and understanding of just how tight credit markets were in the late summer and early autumn of 2007, leaving Northern Rock without access to the borrowings it needed. Even her beefed up role to set Minimum Lending rate was prejudiced by the change of inflation target before the 2005 election. As we saw in 2007 there can be times in the market when real interest rates charged between banks and charged by banks can be different from the rate set down by the Bank, if the Bank fails to keep markets liquid enough. The Northern Rock crisis was one of the worst events in the long history of the Bank of England, and it is still a long way from happy resolution.

What should the government give the Bank as a birthday present? I suggest three things:

1. The power to carry out day to day supervision of the other banks
2. The duty to act for the government to borrow money in the markets
3. The task of acting as a proper bank manager to the new state bank (formerly Northern Rock) to get the taxpayers money back as quickly as possible.

The Bank of England needs to strengthen its capability in traditional banking to carry out these tasks well.

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4 Comments

  1. Posted March 1, 2008 at 10:05 am | Permalink

    The Bank of England was founded by Scot Sir William Paterson, yes, the same Sir William Paterson of Darien Project fame. The ill fated business venture of buying up tracts of land unseen. The venture collapsed with huge debts, leaving many people ruined. Historians suggest that this crisis bankrupt Scotland and was a precursor to the Act of Union.

    Northern Rock = Darien II

  2. David Hannah
    Posted March 1, 2008 at 5:26 pm | Permalink

    How about giving the BoE some knowledge of the financial products being traded today; products that are largely responsible for the current financial turmoil. I was astounded to learn from the recent Dispatches programme on Channel 4, that the BoE had no real knowledge or concern about the US sub prime mortgage market, despite repeated warnings about its viability. The bank was portrayed as an old-school institution, versed in the culture of safe banking that has characterised our country for generations, but no so au fait with the smoke and mirror get rich quick schemes perpetrated by the current crop of financial shysters, of which the British banks seem to be the biggest players.

  3. mikestallard
    Posted March 2, 2008 at 8:29 am | Permalink

    Do you think that the current government will go bankrupt (like the Scots)? With over £100 billion out of play on a yearly income of just £600 billion, it does seem likely, especially if it is the government, not the financial experts, like the Bank of England, who are running the show.

  4. propertyshadow
    Posted July 16, 2008 at 5:00 pm | Permalink

    How are you? Will you help? Lets have some serious comments on here. Deems the government is not listening, can you hep us? I doubt it. TAX TAX TAX thats all we get! the only party I support is my own and thats it

    Ive tried to get on the housing ladder bur no! The only goodly boyz work @ http://www.prpoerty-england.com good advice and buckining the system.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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