Wednesday, 22 October 2014

The Old Lady of Threadneedle Street

By Deepa Mathew

She is comfortable in her position in Threadneedle Street, having been there since 1734. Walking up from the depths of Bank Underground Station one quickly makes her acquaintance. Her nickname came to be only in 1797, created from the creative mind of the cartoonist James Gillray. Yet there is much more to the Bank of England...

Her birth came in 1694 in order to help the government with raising funds during King William III’s war with France. This was achieved by collecting money raised from private investors. She has evolved over the years to give many more uses; issuing bank notes, storing gold and protecting the economy from shocks – as befits her job as a central bank.

Bank of England

Conflicts have always taken a toll on the Bank. Back during the Napoleonic Wars (late 18th century – 1815) their withdrawals had to be restricted in order to maintain sufficient gold reserves. It was around this time that James Gillray drew up the famous cartoon. Erstwhile Prime Minister William Pitt the Younger is depicted as trying to persuade the elderly lady, that is the Bank, to release some gold.

Despite changes some things have always stayed the same. Take any pound sterling note today and you will find the assurance that the Bank will ‘pay the bearer on demand the sum of’ money. This ‘promise to pay’ has been found on bank notes for over 300 years.

Our modern banknotes were based on goldsmith’s notes. These previous banknotes were essentially IOU notes for gold deposited in the bank. They were handwritten before being authorised by a bank’s cashier and were made out for exact values.

Nowadays the legal tender is printed in a factory in Essex and in the denominations of: £5, £10, £20 & £50. This is under the authority of the Royal Mint.

Over 400,000 gold bars are stored in her coffers with each one averaging a hefty 13 kilograms. The Bank itself owns very little as it is merely a custodian, looking after the bars for many clients including the London Bullion Market and central banks of other countries.

The Bank of England is also in charge of introducing quantitative easing. Essentially this is putting more money into our economy to boost spending. Interest rates are used to control inflation. The Bank of England has its own Bank Rate. This is the interest rate at which it lends to financial institutions. When the risks of very low inflation, or even deflation, appear then this Bank Rate is cut. The problem is further avoided by injecting money into the economy.

Why does money need to be injected? The supply HAS to be growing at a certain rate in order to keep up with the economy’s expansion. This in turn will ensure that inflation will remain close to our government’s 2% target.

How is it carried out? Printing more banknotes is NOT the answer. The Bank buys assets from private companies e.g. insurance firms/banks. This results in the seller having more money in their bank account because they have been credited by the Bank of England. With their extra wealth these sellers can then go and spend, which helps to boost economic growth. Or perhaps they will buy other assets instead e.g. shares which in turn push up the price of those assets. This extra money trickles its way down through the economy, extrapolating the spending and growth. Helpful isn't it?

Step outside, head towards the junction of Princes Street and Lothsbury and look into the air. You should find a small gilded statue which looks a lot like a little fairy. This is in fact known as Ariel, after the spirit in Shakespeare’s work ‘The Tempest’. Much like its namesake the statue represents ‘the dynamic spirit of the Bank of England’; which carries credit and trust all over the world. 


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