The bank was founded by the Scotsman William Paterson, in 1694 to act as the English government's banker. He proposed a loan of £1.2m to the government; in return the subscribers would be incorporated as The Governor and Company of the Bank of England with banking privileges including the issue of notes. The Royal Charter was granted on July 27 1694. Public finances were in so dire a condition at the time that the terms of the loan were that it was to be serviced at a rate of 8% per annum, and there was also a service charge of £4000 per annum for the management of the loan. The first governor was Sir John Houblon, who is depicted in the £50 note issued in 1990. The charter was renewed in 1742, 1764, and 1781. The Bank was originally constructed above the ancient Temple of Mithras, London at Walbrook, dating to the founding of Londinium in antiquity by Roman garrisons. Mithras was, among other things, considered the god of contracts, a fitting association for the Bank. In 1734 the Bank moved to its current location on Threadneedle Street, slowly acquiring the land to create the edifice seen today. Sir Herbert Baker's rebuilding of the Bank of England, demolishing most of Sir John Soane's earlier building was described by Pevsner as "the greatest architectural crime, in the City of London, of the twentieth century".

When the idea and reality of the National Debt came about during the 18th century this was also managed by the bank. By the charter renewal in 1781 it was also the bankers' bank—keeping enough gold to pay its notes on demand until February 26, 1797 when war had so diminished gold reserves that the government prohibited the Bank from paying out in gold. This prohibition lasted until 1821.

The 1844 Bank Charter Act tied the issue of notes to the gold reserves and gave the bank sole rights with regard to the issue of banknotes. Private banks which had previously had that right retained it, provided that their headquarters were outside London and that they deposited security against the notes that they issued. A few English banks continued to issue their own notes until the last of them was taken over in the 1930s. The Scottish and Northern Irish private banks still have that right. Britain remained on the gold standard until 1931 when the gold and foreign exchange reserves were transferred to the Treasury. But their management was still handled by the Bank. In 1870 the bank was given responsibility for interest rate policy.

During the governorship of Montagu Norman, which lasted from 1920 to 1944, the Bank made deliberate efforts to move away from commercial banking and become a central bank. In 1946, shortly after the end of Norman's tenure, the bank was nationalised.

In 1997 the bank's Monetary Policy Committee was given sole responsibility for setting interest rates to meet the Government's stated inflation target of 2.5%. This decision was taken by the Chancellor of the Exchequer, Gordon Brown in consultation with Tony Blair prior to the 1997 general election though the announcement was made the day after the election. Should inflation overshoot or undershoot the target by more than 1%, the Governor will have to write a letter to the Chancellor of the Exchequer explaining why, and how he will remedy the situation. This was considered an astute move for several reasons:

It removed the politically controversial responsibility from the government.

It was very popular with the City of London, showing a sign of the new government's desire for a strong economy.

Economic theories on time inconsistency developed by Nobel laureates Edward C. Prescott and Finn E. Kydland, along with empirical experience from New Zealand and elsewhere, suggested that independent central banks could be more successful at reducing inflation without prompting unemployment.

The first ten pound note was issued in 1759, when the Seven Years War caused severe gold shortages. Following the withdrawal of the denomination after the Second World War, it was not reintroduced until the Series C design of the mid 1960s produced the brown ten pound note. The Series D pictorial note appeared in the early 1970s, featuring nurse Florence Nightingale (1820-1910) on the reverse, plus a scene showing her work at the army hospital in Scutari during the Crimean War. This note was subsequently replaced in the early 1990s by the Series E note, where the predominant colour was changed from brown to orange. The reverse of the first Series E £10 featured Charles Dickens and a scene from the Pickwick Papers (this note was withdrawn from circulation in July 2003), while a second Series E note was issued in 2000 featuring Charles Darwin, the HMS Beagle, a hummingbird, and flowers under a magnifying glass, illustrating the Origin of Species.

After the Second World War, the £20 denomination did not reappear until Series D in the early 1970s. The predominant colour of this denomination is purple. The reverse of the Series D £20 features a statue of William Shakespeare and the balcony scene from Romeo and Juliet. In 1992 this note was replaced by the first Series E note, featuring the physicist Michael Faraday and the Royal Institution lectures. By 1999 this note had been extensively copied, and therefore it became the first denomination to be replaced by a second Series E design, featuring a bolder denomination figure at the top left of the obverse side, and a reverse side featuring the composer Sir Edward Elgar and Worcester Cathedral. In November 2006, the Bank announced that a new design for the reverse would be introduced the following spring, featuring economist Adam Smith and a drawing of a pin factory - the institution which supposedly inspired his theory of economics. Smith will be the first Scot to appear on a Bank of England note.