The Value of Money

Text B

Issue Department

The Note Issue

The Bank of England is probably most familiar to the public as the name on the banknotes. The Bank is the sole issuer of currency notes in England and Wales, and although Scottish and Northern Irish banks issue their own notes, most of these must be backed, pound for pound, by Bank of England notes. (Coin is issued by the Royal Mint on behalf of the Treasury, and is not a responsibility of the Bank of England.) The net profits from thenote issue (which are considerable) are paid over to the government.

The notes are designed and produced at the Bank's own Printing Works and issued mainly through the commercial banks' branch networks. The Bank itself has only 5 branches (in Bristol, Birmingham, Leeds, Manchester and Newcastle) and these play a part both in distributing new notes and in taking in old notes for sorting and reissue or destruction. The average life of a Bank note ranges from a year for a J5 note to 3-4 years for a J50 note.

Banknotes are printed on special watermarked paper and much technical and design effort goes into making them difficult to counterfeit. The present series of banknotes was introduced between 199o and 1994.

The Bank's notes originally represented deposits of gold coin and bullion with the Bank and until 1931, when Britain finally came off the gold standard, could be exchanged for gold at a fixed rate - hence the words "I promise to pay" on the face of the notes. Since 1844 the Bank has been authorized to issue notes against securities - the fiduciary issue of notes - instead of just gold or silver. After 1939 only a nominal amount of gold was held and today the note issueis wholly backed by securities.

ACCOUNT FOR THE YEAR ENDED 28 FEBRUARY
	Notes	20XX	20XX
		£m	£m
Income and profits:
Securities of, or guaranteed by, the British Government		838.9	1,012.9
Other securities		441.3	336.5
Other income		0.3	0.4
		1,280.5	1,349.8
Expenses:
Cost of production of Bank of England notes		38.8	32.6
Cost of issue, custody and payment of Bank of England notes		20.1	19.2
Other expenses		3.3.	3.6
		62.2	55.4
Payable to HM Treasury		1,218.3	1,294.4
STATEMENT OF BALANCES: 28 FEBRUARY 1997
	Notes	20XX	20XX
		£m	£m
Assets
Securities of, or guaranteed by, the British Government		10,374.0	9,633.2
Other securities and assets including those acquired under reverse repurchase agreements		11,646.0	10,026.8
Total assets		22,020.0	19,660.0
Liabilities
Notes issued:
In circulation		22,010.8	19,648.0
In Banking Department		9.2.	12.0
Total Liabilities		22,020.0	19,660.0

The first objective of any central bank is to safeguard the value of currency, in terms of what it will purchase at home and in terms of other currencies. Monetary policy is directed to achieving this objective and to providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy operates in the UK mainly through influencing the price of money - in other words, the rate of interest.

The price stability objective is made explicit in the present monetary policy framework, which has been in place since the UK left the Exchange Rate Mechanism of the European Monetary System in the autumn of 1992. It has two main elements: first, a medium-term inflation target, set by the Government, of 2S% or less; and second, a commitment to a more open policy-making regime.

Setting monetary policy - decidingon the level of interest rates necessary to meet the inflation target - is a matter for the Bank and the Treasury. Unlike some central banks, the Bank cannot act independently of government. The 1946 Bank of England Act gives the Treasury the power to issue directions to the Bank and, although it has never formally exercised its powers, the relationship is clearly understood to be one in which the Chancellor of the Exchequer takes the final decisions on interest rates. Nonetheless, the Bank plays an important role in advising the Chancellor and is closely involved in the decisions. As part of the Government's move to increase public scrutiny of policy making, the Bank now publishes a quarterly Inflation Report, which provides a detailed analysis of inflation and gives an independent assessment of prospects for inflation relative to the target. The monthly meetings between the Governor and the Chancellor to review the level of interest rates have been put on a formal footing, and the minutes, which include the Governor's advice, are now published six weeks after the meetings take place.

Once policy is decided, the Bank implements it by means of its operations in the financial markets described below. Although the decision on whether, and by how much, to change interest rates is the Chancellor's, the Bank has discretion over the precise timing of the changes. Unless there is a compelling reason to delay, the Bank will act sooner rather than later.

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