From War Financier to Bankers’ Bank

Abstract

The Bank of England, established in 1694, initially acting as agent of the government to finance costly wars, gradually evolved to becoming a true central bank in the middle of the nineteenth century. Although a privately owned company pursuing commercial activities, it increasingly took on the role of ensuring a smooth functioning of the financial system as a whole. With some regularity the Bank stepped in as lender of last resort, freely lending to solvent firms in difficulty against good collateral and at a penalty rate. This approach is generally followed to this day. The British practice of conducting open buying and selling operations on the money market were gradually introduced elsewhere. The Bank, serving as custodian of the governments’ gold holdings, evolved into the bankers’ bank as commercial banks started to deposit their gold with it for safety and efficiency reasons. London as an international financial center remained dominant well into the twentieth century, the position as backstop of the Bank of England providing the necessary confidence.