Charting the Bank of England’s Balance Sheet Since 1844
When looking at central bank balance sheets lately it’s easy to conclude that your portfolio should anticipate imminent cost-push inflation. After all, if you chart the major central banks’ balance sheets they’re all up and to the right like never before. Well, although this is a remarkable period in history (that may well see relentless inflation and/or sovereign default), it is not without precedent. If you go back far enough you’ll find that the world has experienced this type of environment before… and that the inflationary consequences of monetized fiscal deficits occur only over time. In order to give you a broad view of this subject, here we chart the history of the Bank of England’s balance sheet from 1844 to the present day.
Update: You can now buy the data behind these charts.
The Bank of England’s Balance Sheet Since 1844 – Hover & Click to View Each Time Period…
Although the Bank of England was founded in 1694 it wasn’t until 150 years later, with Robert Peel’s Bank Act of 1844, that it secured a monopoly on the issue of new banknotes. In this act, the bank was separated into two departments; the issue department and the banking department. The issue department was tasked with buying and selling any quantity of gold at a fixed price (issuing and retiring banknotes accordingly), and the banking department was in charge of taking deposits and making loans. Initially the issue department was limited to issuing notes inline with the amount of gold in its vaults plus a “fiduciary issue”. The fiduciary issue (i.e. notes without gold backing, thus only subject to the fiduciary integrity of the bank) started out as £14 million (chosen as such because this was the amount lent to the government).
These terms constrained the degree to which the Bank of England could inflate and finance governments. However, whenever the bank faced problems the government would loosen these rules. As you can see on the chart above, the note reserve of the banking department fell to very low levels relative to its liabilities during the panics of 1847 and 1857; on both occasions the government suspended the Bank Act. This allowed the Bank to effectively increase its fiduciary issue beyond the previously set limits.
As you can see on the chart above, the banking department’s note reserve fell to very low levels once again in 1866. Just as it did in 1847 and 1857, the government suspended the Bank Act of 1844, thus allowing the Bank of England to extend its fiduciary issue. During this period you can see the balance sheet starting to trend higher. The Bank’s rights of issue were increased on two occasions in this period; 1861 and 1866.
From 1880 to 1900 the Bank received several increases in its rights to issue notes. Perhaps most notably in this period, the Bank of England and the Banque de France extended liquidity to Barings Bank during the panic of 1890, setting a precedent for its actions in the 20th century.
In the period shown above and below you see a shape of the balance sheet chart that looks similar to today. This expansion occurred during a period where the major nations of the West had suspended payments in gold (i.e. currencies were entirely fiduciary), making it comparable with today. Much of this balance sheet increase constituted loans to the government to finance the war. As you can see on the chart above, the banking department was able to keep a much lower note reserve relative to its liabilities since gold payments had been suspended. [Note: the fiduciary issue / total note issue ratio goes down on the chart below. The reason for this is a mere technical one; there was an implicit promise to "go back on the gold standard" so it is assumed that the additional note issue would be appropriately backed. In practice the entirety of the note issue was irredeemable and only subject to the fiduciary integrity of the bank.]
In this period you see another doubling of the central bank balance sheet. This time it was due to the “amalgamation of the note issue”. During WWI the British Treasury issued its own, irredeemable £1 notes. After the conclusion of the war they made plans to amalgamate that issue with the Bank of England’s note issue, eventually doing so (and thus doubling the Bank of England’s balance sheet) in 1928. Shortly after this amalgamation Britain found itself unwilling and/or unable to remain on the gold standard.
In this period you see the fiduciary issue consume the entirety of the note issue. This is because the gold reserve was transferred to the Exchange Equalization Account. The relevance of the note reserve in the banking department decreases in relevance from this period onwards as the issue department loses the constraints that stopped it from merely printing any claims made upon the banking department previously.
Again we see a period of significant expansion that is comparable to today. This period spans WWII and saw the Bank of England’s balance sheet expand fourfold over a decade (bear in mind that it doubled/tripled in the previous two sections too). This period also saw the creation of the Bretton Woods agreement, which proceeded restrained the growth in the balance sheet after the war.
The collapse of the Bretton Woods agreement in the early 1970s removed certain restraints on the BoE’s balance sheet. Hence you see its acceleration from 1973 onwards. The balance sheet doubled over half a decade.
Here we get into what one might call the “working memory territory” of today’s investment professionals. As you can see, the rate of expansion slowed (relative to some of the periods shown above) as the Bank engaged in various forms of exchange-rate coordination with the rest of Europe. The growth at the end represented the Bank of England’s temporary involvement in the sale of a part of the UK’s gold reserve (you can find a report on their rational for this sale here).
Finally we get to the present day chart, whose shape we’re all reasonably familiar with. During the crisis of 2008/2009 the Bank of England doubled its balance sheet, and since then it has doubled it again.
From the charts above it should be clear that the recent policy response has indeed been relatively significant. However equally well it should be clear that similar periods have been witnessed and tolerated in the past. The dramatic effects that one associates with inflationary policy occur over time; in particular when government accounts deteriorate to the extent that public debt grows to many times government revenue. You see the type of policy response we see today breeds dependence upon itself, which over time leads to the scenario that produces volatile moves in markets.
If you would like to read about the history of the Bank of England we highly recommend History of the Bank of England by A. Andreades (1909). It’s a really insightful look into how central banking developed and the peculiar relationship between a central bank and its government. It’s available in full for free below (or of course on amazon if you prefer print).
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012