Bank of England
The 1694 institution that let a small island out-borrow France for two centuries and invented most of what a central bank does.
The Bank of England was founded in 1694 to lend the government money for a war, and in solving that problem it created the machinery of modern public finance. The reason a country of five million people spent the eighteenth century defeating a country of twenty million is not that Britain was richer than France. It was that Britain could borrow more cheaply, and the Bank is why.
Founded to fight France
After the Glorious Revolution of 1688, England found itself at war with Louis XIV's France with a navy to rebuild and no way to pay for it. A Scottish projector named William Paterson proposed a deal: a group of investors would lend the Crown 1.2 million pounds, and in return be incorporated as the Governor and Company of the Bank of England, with the right to issue banknotes and handle government business. The subscription filled in twelve days.
The innovation was not the loan. Kings had always borrowed. The innovation was who was on the other side and what secured it. Because Parliament, not the monarch, now voted specific taxes to service the debt, and because Parliament was full of the people who had lent the money, default became close to unthinkable. A loan to the English state was no longer a bet on a king's honor; it was a claim on a tax stream controlled by the creditors themselves.
The result is one of the great numbers in economic history. Over the following century Britain routinely borrowed at interest rates several points below what France paid, and by the Napoleonic Wars carried a national debt vastly larger than France's while servicing it comfortably. France, whose crown had repeatedly defaulted and whose fiscal system leaked through exemptions for the nobility, could not match it, and the pressure of that failure is what forced the calling of the Estates-General in 1789, the first step toward Robespierre and the guillotine. The financial revolution was a weapon, and the French Revolution is partly what happened to the state that lost the arms race.
Learning what a central bank is for
The Bank became a central bank by accident, over two centuries, mostly by mishandling crises and then learning.
It got the note monopoly in England and Wales in stages, and by the nineteenth century its notes were the currency people meant. The Bank Charter Act of 1844 tied note issue to gold reserves in an attempt to make crises impossible by law, and had to be suspended in the panics of 1847, 1857, and 1866, which taught the lesson that rigid rules break in exactly the moment they are needed.
Out of the 1866 collapse of the discount house Overend, Gurney came the doctrine that defines the job. Walter Bagehot, in Lombard Street in 1873, argued that in a panic the central bank must lend freely, at a penalty rate, against good collateral, to anyone who can offer it. Lend freely so the panic stops; penalty rate so nobody uses the facility casually; good collateral so the bank is rescuing the solvent rather than the reckless. That formula was quoted verbatim inside central banks in 2008 and again in 2020, and remains the most influential sentence ever written about financial crisis management.
The Bank also ran the gold standard at its imperial height, when setting Bank Rate in London moved capital across the world, and it presided over the disastrous 1925 decision to return to gold at the prewar parity, which Keynes attacked in a pamphlet and which crushed British industry and helped produce the General Strike.
What it is now
The Bank was nationalized in 1946 and spent fifty years as an arm of the Treasury, with politicians setting interest rates and reliably setting them badly around elections. In 1997 the incoming Labour government made it operationally independent, handing a committee of economists the power to set rates to hit an inflation target. Most of the world had moved the same way, and for two decades independent inflation-targeting central banks were treated as settled best practice.
That settlement is under strain, in Britain and everywhere. After 2008 and 2020, central banks bought government debt on an enormous scale, which looks uncomfortably like financing the state and revives a question the Bank was invented to answer in 1694: what exactly is the relationship between the people who print the money and the people who spend it? The oldest continuously operating central bank in a major economy does not have a settled answer either.