Up until the late 17th century, the English government had always borrowed money from private bankers. However, in the aftermath of the turmoil of 1688-1689, when England was defeated by France at sea, the new government needed rapidly to increase military (especially naval) spending.
To help it to borrow money, it gave permission for the Bank of England (BoE) to be formed. The Bank was set up by private investors and organised the sale of government debt in return for the right to issue bank notes backed by gold.
As time passed, the BoE began to assume wider responsibility for the banking and monetary system, helped by a revised charter in 1844, which prevented competitors from issuing private banknotes.
By 1873, when Walter Bagehot wrote his famous book Lombard Street, it was expected to act as ‘lender of last resort’. In a liquidity crisis the Bank would help illiquid (but solvent) institutions by “lending freely”, though only “against good collateral” and at “penal rates” of interest. The governorship of Montagu Norman, which ran from 1920 to 1944, saw the Bank move closer to the Treasury.
The Labour government that took power in 1945 decided formally to nationalise the Bank. The day-to-day management was still carried out by Bank staff, but key monetary policy decisions, including interest rates, were now set by the Chancellor.
While the power to set monetary policy was given back to the Bank’s Monetary Policy Committee in 1998, the Treasury still owns the Bank through a holding company. The Chancellor also still appoints the BoE’s governor.