The Bank of England provides finance and support to, and may influence interest rates of the private banks through monetary policy. It was originally established as a corporation with private shareholders under the Bank of England Act 1694,Bank of England Act 1694 5 & 6 Will & Mar c 20. to raise money for war with Louis XIV, King of France. After the South Sea Company collapsed in a speculative bubble in 1720, the Bank of England became the dominant financial institution, and acted as a banker to the UK government and other private banks. This meant, simply by being the biggest financial institution, it could influence interest rates that other banks charged to businesses and consumers by altering its interest rate for the banks' bank accounts. It also acted as a lender through the 19th century in emergencies to finance banks facing collapse., discussing Overend, Gurney and Co Because of its power, many believed the Bank of England should have more public duties and supervision. The Bank of England Act 1946 nationalised it. Its current constitution, and guarantees of a degree of operational independence from government, is found in the Bank of England Act 1998. Under section 1, the bank's executive body, the court of directors is "appointed by Her Majesty", which in effect is the prime minister. This includes the governor of the Bank of England (currently Mark Carney) and up to 14 directors in total (currently there are twelve, nine men and three women). The governor may serve for a maximum of eight years, deputy governors for a maximum of ten years,Bank of England Act 1998 Sch 1, paras 1–2 but they may be removed only if they acquire a political position, begin to work for the bank, are absent for over three months, become bankrupt, or "is unable or unfit to discharge his functions as a member".Bank of England Act 1998 Sch 1, paras 7–8 This makes removal hard, and potentially judicially reviewable. A sub-committee of directors sets pay for all directors,Bank of England Act 1998 Sch 1, paras 14 rather than a non-conflicted body like Parliament. The Bank's most important function is administering monetary policy. Under the Bank of England Act 1998 section 11 its objectives are to (a) "maintain price stability, and (b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment." Under section 12, HM Treasury issues its interpretation of "price stability" and "economic policy" each year, together with an inflation target. To change inflation, the Bank of England has three main policy options. First, it performs "open market operations", buying and selling banks' bonds at differing rates (i.e. loaning money to banks at higher or lower interest, known "discounting"), buying back government bonds ("repos") or selling them, and giving credit to banks at differing rates. This will affect the interest rate banks charge by influencing the quantity of money in the economy (more spending by the central bank means more money, and so lower interest) but also may not. Second, the Bank of England may direct banks to keep different higher or lower reserves proportionate to their lending. Third, the Bank of England could direct private banks adopt specific deposit-taking or lending policies, in specified volumes or interest rates. The Treasury is, however, only meant to give orders to the Bank of England in "extreme economic circumstances".Bank of England Act 1998 s 19 This should ensure that changes to monetary policy are undertaken neutrally, and artificial booms are not manufactured before an election.
