The Bank of England (“the Bank”) is a key player in the design and execution of UK economic and regulatory policy. Here we look at how its monetary policy aims have changed through the years.
One of the Bank’s main roles is the operation of monetary policy. The Bank defines this as “action that a country’s central bank or government can take to influence how much money is in the economy and how much it costs to borrow”. A key tool of monetary policy for the Bank is setting the bank rate. This is the interest rate at which other banks borrow from the Bank of England, and it influences interest rates throughout the economy.
For most of the period 1717 to 1931, Britain operated either a formal or de facto gold standard. This meant that any holder of banknotes issued by the Bank of England could present the note at the Bank and demand immediate payment in bullion at a fixed conversion rate. Under this regime, the Bank set interest rates to ensure that sufficient gold was attracted to London to maintain convertibility.
Advocates of the standard argued that it would restrain governments from printing money, so preventing inflation. However, opponents, such as economist John Maynard Keynes, asserted that it led to interest rates that were inappropriate for other economic goals, such as reducing unemployment.
The gold standard was often in force internationally and this effectively led to fixed exchange rates between participating countries. These reduced uncertainty for companies trading overseas. However, they also meant that trade imbalances (for example, an excess of imports over exports) could not be corrected through movements in exchange rates. Instead, they had to take place through ‘real’ factors, such as falls in real wages and employment.
Economic pressures led to the suspension of convertibility on a number of occasions, including during the First World War. Britain returned to the gold standard in 1925, but the economic strains of the great depression forced the final departure in 1931.
Later Monetary Policy Goals
Since leaving the gold standard, other targets for monetary policy have included the actual quantity of money in the financial system (1979 to 1986) or maintaining a particular exchange rate; for example, during and after the Second World War and under the Exchange Rate Mechanism (1990 to 1992). Today, the Bank’s aim is to keep inflation, as measured by the consumer prices index (CPI), near the target rate of 2 percent per annum. The Bank has said that it may also need to balance this with supporting economic growth and jobs. However, debates continue about the appropriate aims of monetary policy, its links with fiscal policy and other aspects of the Bank’s remit and operations.
- David Kynaston, Till Time’s Last Sand: A History of the Bank of England 1694–2013, 2017.
- Steven Durlauf and Lawrence Blume (eds), The New Palgrave Dictionary of Economics, 2008, Vol 1 p. 340-348.
- See the Library’s briefing for more sources and information Bank of England: History, Role and Current Policy Debates, 6 January 2020.
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