The Proposed Bank of England Act - Part Two

Note: This draft Bill is written as a piece of legislation, so it is structured accordingly. If you just want to know how the Bill actually works and don't want to read the legal stuff, read the plain English 'How It Works' instead at http://www.bankofenglandact.co.uk/how-it-works/

How The Act Is Structured:

The Act is split into the Parts, which specify the main provisions of the Act, and the Schedules, which give greater detail on some of the technicalities that will be necessary for the Act to be successfully implemented.

Introduction & Interpretations

This introduction simply clarifies the aims of the draft legislation and clarifies the meaning of the terms that we use later on (an essential part of any legislation). Read the Introduction & Part 1 at http://www.bankofenglandact.co.uk/act/intro-part-1/.

Part 2: Creation of Currency

This part specifies that, once the Act is implemented, the Bank of England will be the only institution permitted by law to 'create money' or increase the money supply in any way. This ends the state of affairs that has existed for the last few hundred years, whereby the banking sector is permitted to effectively create money (and debt) through the lending process.

The Monetary Policy Committee is given the responsibility of deciding how much new money is required in the economy in any period of time. The MPC is made independent and protected from political control or influence, and can not be directed by either the government or civil servants. It does however become accountable to a cross-party committee of elected representatives who can scrutinize its decisions.

Newly created money is added to central government income, where it can be used to fund tax cuts or new government spending, in accordance with the elected government's democratic mandate. Read Part 2: Creation of Currency at http://www.bankofenglandact.co.uk/act/part-2-creation-of-currency/.

Part 3: The Universal Principle

This short part simply makes it a legal offence for any institution other than the Bank of England to create money. The Schedules (which come later) specify exactly how the banking system will be prevented from creating money. Read Part 3 at http://www.bankofenglandact.co.uk/act/part-3-the-universal-principle/.

Part 4: Establishment & Operation of Accounts

This part describes the accounts that banks will hold at the Bank of England, and the types of account that customers of banks will use. It also specifies an account which the central government will hold with the Bank of England, into which newly created money will be paid. Read Part 4 at http://www.bankofenglandact.co.uk/act/part-4-establishment-operation-of-accounts/.

Part 5: General

This part specifies certain activities that will become criminal offences after the Bill becomes law. It also repeals a section of the Bank of England Act 1998, in order to guarantee that the control of the money supply is completely insulated from political influence. Read Part 5 at http://www.bankofenglandact.co.uk/act/part-5-general-points/.

Part 6: Final

This part specifies the extent to which this Act would apply (England, Scotland, Wales, Northern Ireland, the Channel Islands and the Isle of Man), when it will come into force (one year after being voted into law), and defines the short name of the Act as "The Bank of England (Creation of Currency) Act". Read Part 6 at http://www.bankofenglandact.co.uk/act/part-6-final/.

Schedule 1: Establishment Of Universal Principle

This schedule further clarifies that banks will no longer be able to 'create money' or increase the money supply through their lending activies (or any other activity), and defines the only exception to this rule as the Bank of England, who will be authorised to create new money under the direction of the Monetary Policy Committee. Read Schedule 1 at http://www.bankofenglandact.co.uk/act/schedule-1-establishment-of-the-universal-principle/.

Schedule 2: Provision of Customer Accounts

This detailed schedule outlines the two types of accounts that customers of banks will use. Read Schedule 2 at http://www.bankofenglandact.co.uk/act/schedule-2-provision-of-customer-accounts/.

Schedule 3: Establishment of Three Accounts with Bank of England

This schedule specifies the three accounts that each bank will hold with the Bank of England. Read Schedule 3 at http://www.bankofenglandact.co.uk/act/schedule-3-establishment-of-three-accounts-with-the-bank/.

Schedule 4: Funding Loans and Clearing Cheques

This schedule describes how banks will be able to lend to both customers and other banks. Read Schedule 4 at http://www.bankofenglandact.co.uk/act/schedule-4-funding-loans/

Schedule 5: Establishment of Central Government Account

This schedule sets up the account which the central government will hold with the Bank of England, into which newly created money will be paid before it is distributed into the economy. Read Schedule 5 at http://www.bankofenglandact.co.uk/act/schedule-5-establishment-of-central-government-account/.

Schedule 6: Remedies Available to the Bank of England

This final schedule outlines the course of action available to the Bank of England to deal with a bank which has become temporarily or permanently insolvent. Read Schedule 6 at http://www.bankofenglandact.co.uk/act/schedule-6-remedies-available-to-the-bank-of-england/

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