The Bank of England is wor th a mention because it was the first modern central bank. It was established in 1694 but it is only in the nineteenth centur y that its operations star ted to differ greatly from central banks in continental Europe such as the Bank of France and the German Reichsbank. The latter both had branch networks and made loans directly to businesses. They accounted for a substantial propor tion of the banking business in each country.
The Bank of England was different because it had no direct lending to companies. It influenced credit conditions indirectly through its actions in tr ying to control, or at least have an impact on, the behavior of commercial banks. It did this primarily by adjusting the rate at which it would lend to commercial banks.
The Bank of England was established to act on behalf of the government. In the post Second World War period this meant that politicians effectively made many of its decisions. By way of contrast the German Bundesbank and US Fed both enjoyed a high degree of independence from political interference.
Political control meant that the Bank of England was usually required to increase money supply in the run-up to a general election by the party in power. This was intended to give the economy a short-term boost and the electorate the “feel-good” factor. Such an increase in money supply, without a corresponding increase in the real productive capacity of the economy, usually fed through to higher inflation, a depreciation (or devaluation) of the currency and a subsequent tightening of money supply. This gave rise to a period characterized by what became known as “stop-go” economics.
Around the turn of the century the Bank of England was given effective operational independence, being free to set sterling base interest rates and manage supply as it saw fit to keep inflation within a target range defined by Parliament. It also lost its responsibilities as a bank super visor to a newly established, unitar y financial ser vices regulator, the Financial Ser vices Authority (FSA).