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 Englandâ€™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 Â£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 Â£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 Englandâ€™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.