Like the Hydra of Greek myth, the British state has countless heads whose purposes and powers are unified at root. Some wield power directly; others, sometimes known as ‘arms-length organisations’, act on behalf of the ruling class in less visible ways.

The bourgeois state reaches into all aspects of life; it constantly develops its forms and methods; it responds ruthlessly to serious challenge, however small. In a period like this one, where a huge transfer of wealth away from the working class to an ever-smaller section of the ruling class is well underway and a major war is being prepared, the state has to work harder to stifle opposition.

The more visible ‘heads’ of the British state – the armed forces, the police force, the monarchy, Parliament – are not the subject of this series of short articles, which will instead look at some of the smaller bodies performing essential functions for the state, often going unnoticed.

‘The stability of the Bank of England is equal to that of the Government…It acts not only as an ordinary bank, but as a great engine of state.’ The Wealth of Nations, Adam Smith 1776

When Adam Smith described the Bank of England as a great engine of state, he might have added that the coalition of bankers, merchants and wealthy individuals who founded it also created the conditions that made the development of the modern state possible. The relationship between the Bank of England and the state was not just mutually beneficial, it was existential for the interests of the emerging capitalist class they jointly represented.

These days the contemporary Bank presides over the grand scam of financialised capital, but it was founded in 1694 specifically and more simply to fund the Nine Years’ War (1688-1697), when the accession of William of Orange to the British throne in the Glorious Revolution of 1688 secured British resources for the Alliance fighting France. The newly formed Bank lent money to the cash-strapped government for its war in exchange for exclusive banking privileges. This inaugurated a new way of financing war, different from the monarch raising taxes directly, and began the system of ‘public debt’ financed by private investment. The Bank’s directors were not passive investors; they quickly became influential in shaping government policy.

Marx mentions the foundation of the Bank in Capital (Vol. I ch 31): “The financial capital necessary for the birth of big industry and the capitalist mode of production came from the debt engendered by the state with the institution of a central bank - the Bank of England 1694…The Bank of England began lending to the state at 8% and was soon permitted to coin money - which it then used to make its loans to the state. It became ‘the eternal creditor of the nation’.”

The loans, writes Marx, were the ‘capitalised blood of children’ working in the new mills and factories in the early years of 17th century industrialisation. The public debt the loans created became, again in his words, “one of the most powerful levers of primitive accumulation.”

While the accumulation is no longer of the launchpad variety, the mechanism is no different today as analyst and former bond trader Vincent Gomez explains in his essay The Bond Market Bluff: ‘Government pays interest on its debts to the creditors - pension funds, insurance companies, banks, overseas holders of gilts [government bonds] - so high interest rates facilitate a massive transfer of wealth upwards and away from the domestic economy and public spending.’

The British state was at war for almost 80 of the years between 1688 and 1844 as it achieved naval domination of trade routes and established colonies. Throughout this period, the Bank of England was by far the most important institution providing credit to the state, enabling its growth and supporting its military efforts. The Bank simultaneously nurtured the development of a fully monetised economy. Within a decade of its arrival in the City and, to the dismay of the goldsmiths who had been up to that point the holders of gold assets and issuers of credit notes, most of the big London traders had adopted Bank of England notes as currency and were making use of its discount facilities for short-term loans. The Bank also organised the collection of taxes across the country, assuming responsibility for excise in particular. Efficient tax collection was an essential component of the modern state; it forced the population to deal in money.

The outcome of the Bank's early efforts has been described as ‘an effective and efficient fiscal-naval state’ready to promote the successful management of the accelerating Industrial Revolution.

Records show that government spending rises sharply to fund the navy at the point when the Bank is founded and the Bank’s ongoing role as supplier of credit to the government played a critical role in the outcome of the Napoleonic Wars. By issuing paper money, it was able to meet the state’s needs for rapid day-to-day military expenditure, and the beneficiary merchant class was more than ready to back the system with their confidence.

The Bank’s original investors saw and took prescient advantage of the need for a strong executive state standing clear of both monarchy and merchants in order to unify their interests in the form of armed power overseas. The role the Bank played in resolving the struggle for control of the gargantuan East India Company in 1760s and 70s is testament to its long-term strategy in strengthening the state as the means of guaranteeing the financial stability most favourable to making huge profits and protecting them from turbulence of all kinds.

The Bank was formed as a joint-stock company owned by the alliance of speculators who raised the initial funds and, while its functions developed over time, this form of ownership remained essentially unchanged through the 18th and 19th centuries, with banks and other companies becoming stockholders as well. Dividends from its profits (when the government, using tax revenues, paid the interest due on the loans) were passed on to the wealthy shareholders.

The Bank remained in private hands until it was nationalised in 1946 under the Bank of England Act, which refers more than once to ‘the public interest’ as its guiding star. Stockholders were compensated by the government, but the Court of Directors, the Bank’s board, remained unchanged. Since then, the Bank has been wholly owned by the UK government; its capital is held by the Treasury Solicitor on behalf of the Treasury.

It was not the only central bank to be nationalised in the wake of World War 2; many countries followed suit in what was a widespread setback for those who held to the idea of central bank independence. The devastation of the war, coming after the Depression of the 1920s, had made for a dangerous climate of demands for public ownership of public assets. There was also the powerful example set by the socialist countries of a different sort of system altogether. Interestingly, of the eight nationalisations carried out in the UK in the post-war period, the nationalisation of the Bank is the only one not to have been reversed - possible confirmation of the view that it made no material difference to its functioning.

For a period of 50 years following nationalisation, the Bank operated more visibly as a branch of government of a special sort, or at least apparently so. A significant number of influential politicians and bankers were of the opinion that nationalisation had in reality changed very little at the Bank, one of them describing it as ‘theatre’.

But arguments for central bank independence resurfaced in the 1970s with the emergence of neoliberal ideas and policies “under the guise of defending democracy by placing limits on ‘political interference’”, according to Pavlos Roufos in his paper ‘Central Bank Independence & the Politics of Depoliticisation’. Central bank independence, it was argued, was a guarantee against the undesirable politicisation of the economy, by which was meant the danger of governments spending too much in order to secure re-election.

In 1997 - soon after the dismantling of the USSR and in the wake of the 1992 EU Exchange Rate Mechanism (ERM) debacle - the Blair government gave the Bank ‘operational independence’ to set interest rates, with the target of keeping inflation at 2%. This ‘half-way house’ adjustment to the relationship between the Bank and the government gave monetary control to the Bank and left fiscal control with the government of the day. On the one hand capital clearly felt safe enough to further limit the possibility that an elected government might make decisions about the economy that would take too much account of ‘the public interest’, and on the other hand was concerned enough about the chaos that had been generated by government attempts to keep the pound in the ERM to want to send a signal to the markets that their money was now in safer hands.

Since then, the Bank of England has been effectively in control of the economy, while the appearance of political control over the Bank is maintained by its official status as a nationalised institution. The artificial separation of the economic and the political is effected in this way without having recourse to central bank independence, which can carry its own dangers for the establishment if, for example, the Bank becomes too much of a target for public anger over price rises.

Nationalisation has had distinct advantages for the capitalist class. Profit is no longer made for them by the Bank raising 8% on loans to the government, but the Bank controls an infinitely more sophisticated economy from within the safety of its nationalised status, permitting far greater profits to be made elsewhere and in other ways.

The position of Governor of the Bank of England is, according to the Financial Times, ‘widely seen as the most powerful unelected position in the UK.’ The Governor sits ex officio on the Bank’s board, the 14-member Court of Directors. The Court is made up of five executive members from the Bank plus nine non-executive members. All are appointed by the ‘Crown' - that is, the Privy Council, a body whose extensive powers were examined in the previous essay in this series. The board’s members are ex-bankers - both commercial and investment - from banks like Standard Chartered, Barings, Barclays, Lloyds and UBS, along with a venture capitalist or two and others whose careers have been internal to the Bank. Some also come either from the Treasury or the discredited and now defunct Financial Services Authority, which failed to prevent, predict or to act effectively during the financial crash of 2007-9. Andrew Bailey, the present Governor of the Bank, joined the FSA in 2011, shortly before its demise and went on to work in its successor the Financial Conduct Authority. Many of these people also have a history of secondments to other major banks like the US Federal Reserve or the IMF.

The powerful Monetary Policy Committee (MPC), which sets interest rates, has nine members - five from the Bank including the Governor, three deputy governors and the Bank’s Chief Economist; and four external appointments - currently three academics (two of whom are from US universities) plus the ex-chief economist at Citibank. A member of the Treasury is present at MPC meetings to brief on fiscal policy but has no vote.

In brief, a small number of unelected, and therefore unaccountable, people have tremendous power over the functioning of the economy. They make the decisions that protect profits and determine prices. As Liz Truss revealed live on TV in 2024: “What I found out when I got into No. 10 is, I thought that if I got to the top of the tree, I would be able to implement those conservative policies...And what I discovered was that I was not holding the levers. The levers were held by the Bank of England…they weren’t held by the Prime Minister or the Chancellor…”

An important footnote to the question of who runs the Bank is the view that, in the end, it is the bond market buying and selling government debt that’s in control. There are arguments among economists about the extent to which this is the case, but what is not in contention is that the interaction, however it is described, between the Bank and the bond market creates the circumstances in which the government has to operate.

The Bank has one over-riding task - to secure the stability of the financial system by whatever means necessary. It does this in a number of ways:

• it regulates other banks and, since 2012, it also supervises pretty much everything else - insurers, building societies, investment firms etc - which arguably makes it more powerful than it has ever been. Earlier this year, in a clear example of the interests it serves, it increased the risk to users of commercial banks by cutting capital requirements (the amount of capital a bank must hold as a percentage of its exposure to risk) on commercial banks from 14% to 13%. This was an attempt to make the UK more attractive as a destination for capital increasingly drawn to the US

• it provides the clearing system to facilitate payments between other UK banks of up to £775bn a day via the Real Time Gross Settlement (RTGS) system, which carries out every single transaction - the Bank’s electronic ledger or ‘black box’

• it issues banknotes

• it determines monetary policy via three inter-connected mechanisms: 1) it sets interest rates; 2) it controls how much money is in the economy at any one time - it can literally invent and disappear money and 3) it is responsible for meeting the (arbitrary) 2% rate of inflation target. Quantitative Easing (QE) was a recent example of Bank intervention on a macro scale, where a huge amount of digital money was issued to buy back gilts from pension funds in order to push more money into the system, a policy which led to a massive transfer of wealth upwards

• it preserves the value of sterling by buying it on the foreign exchange markets if necessary - during the ERM crisis it was buying £2bn per hour

• it is custodian of the UK’s official gold reserves - a particularly important role during the long period of the gold standard from 1717 to1931. The Bank holds 400,000 ingots of gold, around 5,000 tonnes of metal. It also holds and refuses to return 31 tonnes of Venezuela’s gold, which Maduro deposited there for safekeeping!

• most importantly, it must ensure that people have confidence in sterling and the system. It is Lender of Last Resort (LOLR) - ‘Everyone knows the Bank of England cannot fail’ says the Bank, which must manage inevitable systemic convulsions. Additional liquidity has been liberally and rapidly provided by the Bank during ‘crises’ such as those of 1772, 1825, 1844, 1914, 1987, 1992-3 and 2007-9

One significant Bank function that was removed in 1998 is the issuing and auction of government debt in the form of bonds, known as gilts. This office is now performed by the Debt Management Office (DMO) in the interests of greater transparency, according to Gordon Brown who took the decision. The DMO is part of HM Treasury. So what was a Bank function is now a government function. These re-apportionings of and adjustments to functions often seem to take place after a crisis has exposed part of the machinery to daylight. Far from ensuring greater transparency, they appear to be designed to restore a discreet measure of obfuscation, with a gesture towards greater oversight or new regulatory powers. It was in the long aftermath of the ERM meltdown that the Blair government handed monetary policy over to the Bank - and at the same time took the gilt business away.

Sterling is a fiat currency; that is, it is not backed by gold or any other commodity asset. Its successful functioning and circulation depends ultimately on people’s faith in it. It could be argued that all the Bank’s separate functions combine to support its most important role: to maintain faith in sterling.

This was not something it had to concern itself with during the period of the gold standard 1717-1931, and was a less significant part of its role during the Bretton Woods era when the pound was pegged to the value of the dollar, which was itself tied to gold until 1971. Bretton Woods came to an end two years later. Since then, sterling has been a currency the Bank can create at will, provided it meets its monetary obligation to control inflation. It conjures central reserves of sterling digitally, out of nothing, to supply government and make loans to banks so they can lend without collateral.

‘Central bank reserves are part of the magic that makes sure the money system, at least most of the time, is something that people do not need to worry about.’ These are the less than reassuring words of Rupal Patel & Jack Leslie, two Bank of England economists. In their book, Money: The Inside Story 1 they explain in Blue Peter terms what the Bank does in its role as conjuror. They define the Bank’s job succinctly as being ‘to make sure money works and fix it when it doesn’t.’ They add: ‘Trust is the all-important ingredient that makes money work’ and to this end they define the Bank’s role as that of protector. The Bank ‘protects’ the value of money and it ‘protects’ people’s trust in money. It does this, they say, ‘in creative and peculiar ways’, ways the ordinary user of sterling might not understand as Vincent Gomez points out in The Bond Market Bluff:

‘Most voters cannot easily interrogate the claim that gilt markets will revolt if spending rises.

The mechanics of government finance, from how the Bank of England operates day to day to how sterling assets circulate through the financial system, are not taught in schools or explained in most political commentary. The gap in understanding serves a purpose….”

We should expect the Bank’s methods to become more ‘creative’ and more ‘peculiar’ as the crises endemic to capitalism become deeper, more dangerous and more frequent. If the Bank’s role in a financialised system is to maintain the credibility of a system that works more and more openly for the speculators, it must do that by putting more imagination into appearing to manage things for working people. In the end, an impossible task.

The World Economic Forum (WEF) 2026 held a special session for central bankers to discuss their ‘increasingly complex role’ and to examine the tools necessary to maintaining stability in a turbulent global system. The session stressed that the management of domestic discontent via price stability is the ‘primary mandate’ of central bankers. But it also sounded a warning note about the danger of paying too much attention to domestic price stability at the expense of international capital. This is a fine line to tread and getting finer as prices rise. Speakers also cited the increased use of ‘economic statecraft’ (aka economic warfare) by ‘some states’ as a problem likely to cause shortages and price rises and so increase instability generally. Overall, the session urged discretion and caution, while at the same time insisting central banks should hold fast to the separation of monetary and fiscal policy as a core principle, that is to keep control of interest rates at all costs.

The session revealed the high-wire performance going on in the face of sharpening contradictions.

“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.” Lord Acton 1834-1902

The Bank has weathered and learned from many crises, and is prepared for more. More prepared than one might think - there is a series of bore-holes 300m deep under the Bank to guarantee water supply in the event of a prolonged and major crisis whatever form that might take.

Establishment watchdogs keep a close eye on developments in this febrile environment. In July 2026, the Financial Times published two articles critical of the Bank, one under the heading ‘Bank of England hit by internal divisions’, which quoted David Aikman, director of the National Institute of Economic and Social Research, an influential establishment think tank: “The strength of the Bank of England’s executive voice as a coordinating device has declined. Things feel fragmented.” The article ascribed this loss of authority to the over-valuing of individual views on the Monetary Policy Committee at the expense of a collective assessment: “Deep splits of opinion on the Bank of England rate-setting committee are making it harder to rebuild the central bank’s credibility after five years of inflation running above target…. constant experimentation with economic ‘scenarios’ is wrong footing bond market investors…” The Financial Times also flagged a warning about loss of staff and expertise. The second piece forecast yet another massive liquidity crisis as the Bank attempts to limit the power of hedge funds to sell off gilts as they did so rapidly and successfully in 2022.

As the current Governor, Andrew Bailey is fully aware of the proximity of crisis, as he reported, speaking anything but ‘frankly’, to a parliamentary committee early in 2026: “There has been a huge change in, frankly, the structure and nature of intermediation in government bond markets in the last five to 10 years. They are now dominated by nonbank institutions, and hedge funds are a very big part of that…I will be quite frank: this market development has enabled a lot more debt issuance; it is a structure that is supporting a lot bigger markets, in that sense. That is not a UK point specifically, but all governments are therefore benefiting from the ability to issue more debt….The question we have to face is, is that a robust structure from the point of view of financial stability?” (Financial Times, August 14 2026)

The Bank itself has rarely been the target of direct protest, but it was once attacked physically, during the Gordon Riots of 1780 when violent protests against high prices and unemployment erupted in London. Despite initially being hijacked by anti-Catholic agitators, the rioters made their way in the end to the places they held responsible for the hardship they faced: they burned down Newgate Prison and the tollbooth on Blackfriars Bridge, and attacked the Marshalsea and Fleet prisons. But it was their assault on the Bank that brought in the troops. Hundreds of the protesters were shot, and dozens publicly hanged after the riots had been put down.

Designed and built soon after the riots, the Bank’s massive, featureless walls are high as its institutional memory is long. In a Bank pamphlet dating from 1970, it describes itself - rather as the Privy Council does - as the embodiment of the national character as they would have it: “The Bank of England has developed in a typically British way, without any kind of revolution and with experience taking the place of an elaborate written constitution.”