The Bank of England is the central bank of the United Kingdom. Most countries have a central bank. For example, the Federal Reserve System in the United States, the Deutsche Bundesbank in Germany, the Banque de France and the Bank of Japan. Each differs a little from the others in the range of its activities, in the powers and techniques it can use and in the nature of its relationship with its government, but they all serve as bank to both their country’s government and to its banking system. It is through the interaction of these two roles that central banks come to play their key part in carrying out monetary policy in their respective countries, that is, policies affecting the cost and the availability of money and credit. This makes central banks individually important in their domestic economies and collectively extremely influential in world financial markets. In addition, the Bank of England, like many central banks, is responsible for the overall stability of the country’s financial system.

Set up in 1694 as the result of a proposal by Scottish merchant William Paterson, the Bank of England is one of the oldest central banks. However its original purposes and functions were very different from its present ones. It started as a commercial bank with private shareholders and developed a large private banking business. It was not until 1946 that it was brought into state ownership but for many years before that the Bank had seen itself, and behaved, as a public institution carrying out public functions. These functions included, from the very start, acting as the government’s bank and arranging its borrowing. The Bank has also always had the right to issue bank notes in England and Wales, and acquired the monopoly after the Bank Charter Act of 1844. The same Act accelerated the Bank’s withdrawal from commercial banking to concentrate on its role as banker to other banks and to government. This increased its influence over monetary conditions. The Bank also took on a degree of responsibility for maintaining orderly money and capital markets in London and it watched over the soundness of the banks. In the modern market economy these central banking functions play a vital role and have evolved from being based upon tradition and informal relationships between the Bank and City firms to a situation where the Bank has a formal responsibility for the stability of the system.

The following section of this article describe the Bank’s major functions. There are many of them, but all are related to the pursuit of three objectives. These are listed in the table below

Reproduced by kind permission of the Bank of England