The current financial crisis raises fundamental questions about the relationship between the commercial banks and the Bank of England. Before 1997 Britain had a system in which the Bank of England had an understood responsibility to act as lender of last resort to the banks and to help them if they had difficulty funding their assets. That system was a success, which was copied around the world. Unfortunately, it was undermined by Gordon Brown’s so-called ‘reforms’ at the start of his Chancellorship, leading to the worst financial crisis in this country since the South Sea Bubble.

The Bank of England should be privately owned – as it was for more than two and a half centuries prior to 1946. Its capital should be provided by the commercial banks and it should have regulatory power over these banks in addition to providing a lender of last resort facility. These supervisory and lender-of-last-resort functions are inseparable.

If we do not seize this opportunity to establish a sound and viable structure for British banking, we face the very real risk that we will lose a major proportion of our financial services industry to markets regulated by the European Central Bank or the Federal Reserve.

Download Central Banking in a Free Society by Tim Congdon.

Shadow Monetary Policy Committee

Tim Congdon CBE is an economist and businessman, who has for over 30 years been a strong advocate of sound money and free markets in the UK’s public policy debates. He was a member of the Treasury Panel of Independent Forecasters (the so-called “wise men”) between 1992 and 1997, which advised the Chancellor of the Exchequer on economic policy. He founded Lombard Street Research, one of the City of London’s leading economic research consultancies, in 1989, and was its Managing Director from 1989 to 2001 and its Chief Economist from 2001 to 2005. He has been a visiting professor at the Cardiff Business School and the City University Business School (now the Cass Business School). He was a Visiting Research Fellow at the London School of Economics between 2005 and 2007. He was awarded the CBE for services to economic debate in 1997. His books include Monetarism: an Essay in Definition (London: Centre for Policy Studies, 1978), Monetary Control in Britain (London: Macmillan, 1982), The Debt Threat (Oxford and New York: Blackwell, 1988) and Reflections on Monetarism (Cheltenham: Edward Elgar, 1992). In 2005 the Institute of Economic Affairs published his monograph on Money and Asset Prices in Boom and Bust, and in 2009 it published a further monograph on Central Banking in a Free Society. A collection of papers on Keynes, the Keynesians and Monetarism (Cheltenham: Edward Elgar) appeared in September 2007. His latest book, Money in a Free Society (New York: Encounter Books, 2011), is more specifically a response to the Great Recession. In June 2009 Tim Congdon set up a new economic consultancy, International Monetary Research Ltd., of which he is now chief executive. Tim Congdon was honorary secretary of the Political Economy Club from 1999 to 2010.