What does the Bank of England Do?

Isaac's class is studying Financial Literacy so we decided to go to the Bank of London Museum.  We learnt lots about money that you can read about on his blog.

http://boodlesawesometrips.blogspot.co.uk/2015/09/the-bank-of-england-museum.html

THE JOB OF THE BANK OF ENGLAND

One of the things I learnt a lot about was the job of the Bank of England.  Here are some of the things I learnt.

The bank says their job is to "promote the good of the people of the United Kingdom by maintaining monetary and financial stability."

Keeping the Inflation Rate at 2%

One of the main ways the bank keeps the country financially stable is by keeping the inflation rate at 2%.  (This is a goal set by the government).

Here is one activity where I had to try and balance the inflation rate at 2%

  

Inflation is when prices for goods and services go up.  When they go up our money becomes less valuable and can't buy as much.  The banks job is to keep the inflation rate at 2%.  For example if something is worth $100 and it goes up by 2% it will be worth $102.  The bank doesn't want inflation to be too high or too low.  It can be a tricky balance.

Interest Rates

One way the bank can affect the inflation rate by increasing or decreasing interest rates.  

If prices are getting to high (inflation is rising too high) the bank will put up interest rates.  If interest rates go up people have to pay more interest on money they have borrowed.  For example if people have borrowed money from the bank to buy a house it's called a mortgage.  If the interest rate goes up they have to pay more money for their mortgage.  That means they have less money to spend on other goods and services.  If everyone is spending less then prices of goods and services drop to encourage people to buy more.

If Inflation isn't high enough the bank can lower interest rates.  This means that people will pay LESS on money they have borrowed.  That will mean they have MORE money to spend on other goods and services.  More spending is called more demand.  High demand will push prices up.

Quantitive Easing 

If inflation falls sharply another way the bank can help keep to it's 2% target for inflation is to inject money straight into the economy by creating money electronically if the inflation rate looks like it's going to be too low.  It's a really complicated process.

In this activity I had to sail a boat and use the handle to keep the interest rate at 2%.  I also had a quantitative easing button to use for inflation or deflation. 

Making sure people trust the money system (Maintaining public trust in currency)

When the banking system was first set up people would take their gold to the bank and the bank would give them a piece of paper with a promise on it to give back the gold when they needed it.  So they would always have the actual gold as a back up.  

This is an original 'promise' note given out by the bank promising to return people's gold.

But now, the notes and coins we use aren't worth anything so the only way the system works is if people trust the money is worth something.

One way that the bank makes sure that people trust the money is by making sure it's really hard to make fake or counterfeit money.  They do this by putting lots of special protections on the notes.  For example, notes have a watermark that can be seen when you hold it up to the light.  Some notes have microlettering which is really tiny microscopic lettering.  Some have a metallic strip down the middle.  Others have a hologram.  Others have a special mark you can only see when you hold it under a UV light.  By doing this the bank helps people be able to trust that money isn't fake.

Here I'm checking a 20 pound note under a special UV light.

This is a close up of the glowing "20" mark you can only see under UV light.

Also, they put the faces of people who are famous that people trust (such as the Queen and other people who have done great things for the country on the notes.)

Isaac and I are putting bank note puzzles together and learning all about the famous people on the different notes.

While the bank tries to keep everything financially stable there have been times where England's enemies have tried to do the opposite.  During the second world war the Germans actually tried to remove the public's trust in the bank notes by creating lots of fake notes and putting them into circulation.  This could have caused huge problems for England if they had led to the public not trusting that any money they had was real.

These are some of the actual forged notes

The counterfeit problem was only picked up when the notes were returned to the bank to be destroyed (which all notes are after a certain amount of time) and they noticed that the serial number of some of the notes had already been returned.  After that time all notes above 5 pounds were destroyed, so the only notes available for use were the 1 pound and 5 pound notes for a really long time.  

Taking Care of Gold

The Bank of London takes care of a lot of gold bars in the bank vaults though most of them don't belong to the bank anymore.  We got to touch one, which was about 97.5% gold (which is quite normal as none of them are quite 100%).  It weighed 13kg and was worth 291,781 pounds - just for one bar!

Here I am lifting the gold bar.

We learnt lots about the gold bars in the vault.  One thing we learnt was that the bars are stacked with 80 bars per pallet.  So I decided to use the multiplication skills I have been using in maths to work out how much each pallet would be worth.... 23,342,480 pounds!!!!