Dishonest Money: CHAPTER 7 Central Banking is Born by Joseph Plummer

 

Dishonest Money: CHAPTER 7 Central Banking is Born by Joseph Plummer

 

CHAPTER 7
 Central Banking is Born

It is significant that the Bank of England was launched to help the English government finance a large deficit. Governments everywhere and at all times are short of money…The reason is simple: unlike private persons or firms, who obtain money by selling needed goods and services to others… Governments can only obtain money by grabbing it from others, and therefore they are always on the lookout to find new and ingenious ways of doing the grabbing. Taxation is the standard method; but, at least until the twentieth century, the people were very edgy about taxes, and any increase in a tax or imposition of a new tax was likely to land the government in revolutionary hot water. –Murray Rothbard, The Case Against the fed

England in a Bind

 

Financially drained by 50 years of war against France (as well as numerous civil wars fought largely over excessive taxation), England was in desperate need of new revenue.

 

Specifically, King William was not only broke in 1693, he was in the middle of the “War of the Grand Alliance” and his options for obtaining money were very thin.

 

He could try to raise taxes, but then again he could also wind up with another civil war on his hands. He could try to borrow the money, but just 20 years earlier his predecessor (King Charles II) flatly refused to repay over a million pounds he’d borrowed. This betrayal wiped out the savings of thousands of individuals and, logically nough, did nothing to boost enthusiasm for “lending money to The Crown.”

 

King William could try printing his own fiat currency, but even that seemed unlikely to work. You see, King Charles II had done that too and the currency was never widely accepted. (Given a choice between real money and fiat money, issued under the “authority of The Crown” but backed by absolutely nothing, the people always preferred the real thing.) If only there was a way to print fiat money and have people accept it as real money…if only there was a way. Perhaps, with a little creativity, there was.

 

Let’s back up for just a minute. Pretend King William’s credit was fantastic. Pretend he had no problem borrowing the real money he needed to finance his war. We’ll say a group of bankers contacted him at the height of his financial problems and said: “King William, we’ll happily buy every war bond you want to sell. we know you’ll make your interest payments on time and, when it’s time for us to cash in our bonds, you’ll pay us in full on demand…we trust you 100%.” If this scenario were true, the King could easily raise all the money he needed. It would come directly from the bankers in the form of gold (or receipts fully backed by gold) and the King could then easily pay his soldiers, suppliers, etc. without worrying about his payments being rejected. The bankers would make a fortune financing the war and the King would have his money. Everyone (except those fighting and dying of course) would win…and what could be better than that?

 

So the bankers, being the unscrupulous but highly intelligent lot they were, came up with an ingenious plan. If the King would grant them an exclusive license (a monopoly) to issue England’s paper currency, the bankers (in return) would loan the King all the money he needed. The money for his loans would be created out of nothing (backed by only a fraction of coin) but nobody would know that.

 

The newly created bills and notes were indistinguishable from those previously backed by coin, and the public was none the wiser.” (This guaranteed the currency would be) “…accepted at full face value in payment for the expenses of war.”

 

In this first official act of the world’s first central bank can be seen the grand pretense that has characterized all those which have followed. The Bank” (of England) “pretended to make a loan but what it really did was to manufacture the money for government’s use. If the government had done this directly, the fiat nature of the currency would have been immediately recognized, and it probably would not have been accepted at full face value…

 

But the Bank of England also received other privileges for agreeing to assist the government. Not only did the bank get to create money out of nothing and loan it to the government at 8% interest, it was also permitted to count the government bonds as reserves, giving it the ability to create even more money out of nothing for loans to the general public.

 

So basically, it goes like this: The government has no money so it creates a bond. (The bond is nothing more than a piece of paper with a dollar amount printed on it, or in this case a Pound “£” amount, printed on it.) The government then offers the bond as collateral for a loan. Rather than purchase the bond with real money, the Bank of England simply “creates money out of thin air” in the amount needed. The bank can now collect 8% interest on the money it just loaned to the government. (If the bond is valued at £1,000,000, the bank will earn £80,000 per year in interest/profit.)

 

But wait, there’s more! The Bank is also permitted to count the bond’s printed value the same as it would an equal amount of gold. In other words, using the bond as “reserves,” it can now print another pile of money (equal to whatever is printed on the bond) and loan that out at interest too! Must be nice, huh?

 

Rothbard writes:

 

In short, since there were not enough private savers willing to finance the deficit, Paterson and his group” (the men behind the Bank of England) “were graciously willing to buy government bonds, provided they could do so with newly-created outof-thin-air bank notes carrying a raft of special privileges with them. This was a splendid deal for Paterson and company, and the government benefited from the flimflam of a seemingly legitimate bank’s financing… As soon as the Bank of England was chartered in 1694, King William himself and various members of Parliament rushed to become shareholders of the new money factory they had just created.

 

As if the millions in newly created “Bank of England” notes weren’t bad enough for the economy, banks outside of London were permitted to use gold or Bank of England notes as reserves for the money they issued. So, assuming the permissible “fraction” of reserves was 50%, that meant these country banks could create two new units of their currency for every single Bank of England note they held in their vaults. All of this new money flooded the economy and within just two years, prices had more than doubled. Predictably, people began to lose faith in the currency. That was followed by a run on the Bank and, “surprise, surprise,” the Bank of England did not have enough gold coin to satisfy the demand.

 

With that, the fraudulent nature of the new currency was exposed and the scam was over…or was it? King William still needed the Bank, and the Bank needed King William. In short, like any cabal, the conspirators needed each other to protect their own interests.

 

When banks cannot honor their contracts to deliver coin in return for their receipts, they are, in fact, bankrupt. They should be allowed to go out of business and liquidate their assets to satisfy their creditors. ...That, of course, was not allowed to happen. The Cabal is a partnership, and each of the two groups is committed to protect each other, not out of loyalty, but out of mutual self interest. …In May of 1696, just two years after the Bank was formed, a law was passed authorizing it to suspend payment in specie.” (Gold) “By force of law, the Bank was now exempted from having to honor its contract to return the gold.

 

This was a fateful event in the history of money, because the precedent has been followed ever since. In Europe and America, the banks have always operated with the assumption that their partners in government will come to their aid when they get into trouble. Politicians may speak about “protecting the public,” but the underlying reality is that the government needs the fiat money produced by the banks. The banks, therefore – at least the big ones – must not be allowed to fail. Only a cartel with government protection can enjoy such insulation from the workings of a free market.

 

No longer obligated to redeem their paper in gold, the banks went to work creating ever larger quantities of money. The result was more inflation and more suffering for the general public. But not for the cabal; King William benefited from the mechanism of extracting purchasing power from the people via inflation, and the bankers reaped the rewards of loaning massive amounts of money created out of nothing. And the game continued.

 

Fast forward about 100 years: Concerned about rising gold prices, the British Government assembled a special committee in 1810 to determine the cause of (and a solution to) the problem. The final report hit the nail on the head: Gold prices weren’t rising; the purchasing power of the currency was going down. Too much money was being created and dumped into the economy. Piles of new money (chasing the same amount of products and services) were driving prices up. More importantly, the committee correctly identified the solution: Bank of England notes should be made fully convertible into gold coin. This would limit the amount of paper currency that could be created to the amount of gold held in bank vaults and prices would stabilize.

 

Although everyone agreed with the solution, the war with Napoleon ensured it wouldn’t be implemented. England needed to extract purchasing power from its citizens to pay for the war, and the bankers provided a sneaky way to do so. (Just something to consider: A wise businessman determines where his biggest profits come from and focuses on that market. How long do you suppose it took the bankers to figure out that “governments at war” were their best customers? At some point they must have realized that “war” guaranteed their mechanism for generating enormous profits, on money created out of nothing, would be safe.)

 

Prices continued to rise and by 1815 they had again doubled. This was followed by a strong downward correction, plunging England into a deep depression. The monetary system was an inexcusable mess and so, after the war with Napoleon ended, the Bank of England was required to again redeem its notes in gold. But it was not a true 100% gold standard; it was merely a fractional reserve system. The Bank still created money out of nothing for the purpose of lending and within 4 years of implementing the new “safe fractional limits,” a brief inflationary boom was followed by an inevitable bust. Countless fortunes were wiped out and England was again thrust into depression.

 

By 1839, demands for a legitimate solution to England’s booms and busts had grown too loud to ignore. After 5 years of intense analysis and debate, the Peel Act was passed in 1844. Unfortunately, the act was a political compromise and fell far short of what was required to correct the problem. Even its attempts to limit the amount of paper currency banks could create proved largely irrelevant. That’s because the act did nothing to limit the amount of “checkbook money” a bank could create. In other words, the bank might have been prevented from creating £1 million in paper currency for a loan, but there was nothing to stop it from simply typing a £1 million balance into a borrower’s checking account.

 

Within three years of the “reform,” England faced another crisis with still more bank failures and more losses to depositors. But when the Bank of England tottered on the edge of insolvency, once again the government intervened. In 1847 the Bank was exempted from the legal reserve requirements of the Peel Act. Such is the rock-steady dependability of man-made limits to the money supply.

 

It is an incredible fact of history that, in spite of the…recurring failures…during these years, the central-bank mechanism was so attractive to the political and monetary scientists that it became the model for all of Europe. The Bank of Prussia became the Reichsbank. Napoleon established the Banque de France. A few decades later, the concept became the venerated model for the Federal Reserve System. Who cares if the scheme is destructive? Here is the perfect tool for obtaining unlimited funding for politicians and endless profits for bankers. And best of all, the little people who pay the bills for both groups have practically no idea what is being done to them. (Emphasis added.)

 

Believe it or not, history actually does provide us a few examples of honest banking. The Banca della Piazza del Rialto is one such case. Sustaining itself solely on service fees (from storing coins, exchanging currencies, notary services, and facilitating payments between customers), the bank not only prospered, it became the center of Venetian commerce. In fact, the bank became so trusted, its paper currency actually traded at a premium over coins!

 

To understand how this is possible, consider an economy with many different kinds of coins being traded; some of them shaved, some heavily worn, some debased with other metals. It wasn’t easy for an average citizen to perfectly determine each coin’s worth. But this was precisely the kind of expertise the bank brought to the table. Depositors brought their coins to the bank; the bank carefully examined the coins to determine their value and then issued a proper amount of receipts.

 

The public, therefore, was far more certain of the value of the” (bank’s) “paper receipts than of many of the coins and, consequently, was willing to exchange a little bit more for them.

 

Unfortunately, politicians eventually succumbed to the temptation of creating money out of nothing and that was the end of that.

 

The Bank of Amsterdam provides another example. By limiting itself to honest banking, the Bank’s paper currency became the preferred method of making and receiving payments in and around Amsterdam. Its paper also carried a premium. However, once this level of trust had been established, the temptation to exploit it was (apparently) too great to resist. The Bank began creating additional currency (money out of nothing) and although it enjoyed the immediate profits, it also reaped the inevitable harvest… insolvency.

 

Germany’s Bank of Hamburg provides our final example.

 

For over two centuries it faithfully adhered to the principle of safe deposit. So scrupulous was its administration that, when Napoleon took possession of the bank in 1813, he found 7,506,956 marks in silver held against liabilities of 7,489,343. That was 17,613 more than was actually needed. …Because of foreign invasion, the bank’s currency was no longer fully convertible into coin as receipt money. It was now fractional money, and the self-destruct mechanism had been set in motion. The bank lasted another fifty-five years until 1871 when it was ordered to liquidate all of its accounts. …That is the end of the short story of honest banking. From that point forward, fractional-reserve banking became the universal practice.

 

The fraudulent “fractional reserve” system continues to this day. However, unlike its earlier incarnations, the game is now more sophisticated (and far more profitable). At least the pioneers of the scam kept some gold or silver as reserves to back their loans of new money (created out of nothing). Today, the “reserves” that banks rely on to create new money have no intrinsic value whatsoever. In other words, where once a bank might issue paper money equal to ten times the value of the gold or silver coins they held in their vault, today there isn’t a single ounce of gold or silver backing our currency. Today, our money is created using nothing but fiat paper and computer entries as reserves! There is no real money anywhere. Even worse (yes, there is a “worse”), every dollar in circulation is inextricably tied to debt. What we’re forced to use today is WORSE than fiat money, it is debt money.

 

That last sentence is the real kicker. Our entire monetary system, as it now stands, is based on nothing but debt. Every physical dollar, as well as every digital dollar, had to be borrowed into existence. So long as our entire money supply is made up of this debt money, the bankers are guaranteed to earn interest on every single dollar, every moment it exists. It also means our debt is inescapable. To pay off every loan, we’d have to give back every dollar the bankers have created. This would reduce our money supply to zero…it can’t be done.

 

Robert Hemphill was the Credit Manager of the Federal Reserve Bank in Atlanta. In the foreword to a book by Irving Fisher, entitled 100% Money,  Hemphill said this:

 

“If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible—but there it is.”

 

So the bankers not only profit from this debt money system, they’ve structured their business in such a way that we (operating within the rules of the system) can never escape it. Who in their right mind would hand over this kind of power and control to an unelected group of financial elites? It’s nothing short of economic slavery.

 

It’s important to remember, we’re in this mess not just because of the “unscrupulous but highly intelligent” individuals who conspired to gain control of our nation’s money supply, but also because of our elected officials who handed it over and continue to support (and benefit from) the arrangement.