The Bank of England is the Central bank of Britain. It has the dubious honor of being the first Central Bank to have existed and it’s the model upon which all other Central Banks are based. BoE Duties So, what does the Bank of England do? What are its duties?
• It determines monetary policy.
• It controls the money supply.
• It lends money to the British government in the form of bonds.
• It sets interest rates in line with the inflation targets designated by the Treasury.
• It’s the official custodian of the gold reserves for Britain.
• Finally, it’s “the lender of last resort”, or “the bankers bank”.
This means that it acts as a support should any banks get into difficulty in any financial crisis. the money supply Let’s look at one of these aspects in a little more detail – the control of the money supply.
Ever since 1694, the Bank of England has had a monopoly to create currency. The bank has been in charge of the issuance of bank notes. These are known as “promissory notes” because a bank note, essentially, is a “promise to pay”. If you look at the writing on, say a twenty pound note, you will see that it says “I promise to pay the bearer on demand the sum of twenty pounds”.
So, a bank note is a “promise to pay” a stated sum of money on demand by the bearer of the note. What this means is that the bearer of the bank note would have been able to redeem the bank note for its stated worth in gold. Put in simple, everyday terms … someone in possession of the bank note should have been able to go into the Bank of England and exchange the bank note, getting whatever amount of gold is denoted by the sum on bank note in return.
To put it another way, a bank note is a glorified IOU for gold. There are a number of points I wish to make about this state of affairs :- Point number 1 – substitute for gold (real money) In effect, the bank note acted as a substitute for gold. Because these notes were exchangeable for gold, the bearer of the note could use them as if they were gold.
They were “as good as gold” and so, they could then be used to buy goods, or services. This, by the way, is the basis of the Gold Standard (more on which shortly). Point number 2 – gold was considered as real money It must be understood that gold and silver are monetary metals. Back in those times, both were considered as being money. Indeed, gold and silver have been used as a medium of exchange and a store of value for millennia - through the ages and also across different cultures.
This persistence over such long periods of time and also the cross-cultural aspect are points which are, to my mind, very telling. Point number 3 – cash was king back then It should be said that, back in those days, and up until relatively recently, “cash was king”. Cash refers to the physical form of currency, paper money and metal coins in circulation – the ones we use every day in stores and such like. So, this includes all the bank notes and all the coins of whatever
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