The Privatization of Money: The Greatest Sabotage in Human History? Part II

Last time we found out that modern money is created when commercial banks make loans to people and businesses. They are not loaning out other people’s money at all, but effectively creating it by entering numbers into a computer. Between Part II and the last article I wrote, a further revelatory article was published in the Guardian by David Graeber of Debt: The First 5000 Years fame. The article is worth considerable thought for anyone who wants to understand modern capitalism. As I hinted at last week, even the capital as power framework has been silent on the issue of money and its creation as interest bearing debt.

This week, I want to share some of my new research with you on the history of money, how the creation of it was privatized and why this act can be considered the greatest sabotage in human history. As this is a blog post and not an academic paper, my history will be somewhat stylized. I’ll include a brief bibliography at the end of this post for those interested in the resources used to think through this history and apply the capital as power approach.

One of the key questions the capital as power approach asks is: what are investors capitalizing when they invest in or come to own income-generating assets? Since we are concerned with money created as debt, in this article we ask what are bank owners capitalizing? The simple answer to this question is that they are capitalizing the bank’s power to create money as debt by extending loans to businesses and people in need of money. This requires exclusion and therefore sabotage to function: counterfeiting must be made illegal and punishment swift if banks are to have this exclusive power. For example, the maximum sentence for counterfeiting in Australia (where I write from) is 14 years in jail. In the United States it’s 15 years in the slammer.

Since everyone needs money to transact in a market economy – including governments – this gives the owners of banks and their directors tremendous power over human life and patterns of investment, development and differential accumulation we experience. The creation of money by banking corporations is also a wonderful system for ensuring that a tiny minority (the owners of the banks) continue to grow ever wealthier from interest payments, dividends and rising stock prices. There’s a reason why most bankers at the top of the food chain are wealthy and their banks are the second most heavily capitalized industry on the planet: the demand for money is both high and constant.

How did this happen?

It has been well documented by numismatists (people who study money) that diverse historical political communities used a variety of materials as early forms of money. For example, the Aztecs used the cocoa bean as a form of currency. But since we are concerned with the creation of modern money we can skip a deeper history of money and move to our major turning point: the establishment of the Bank of England in 1694.

The first thing we have to recognize is that in Europe, the most coveted form of money came to be silver or gold coins. This was largely a legacy of the Roman Empire in Britain but the history stretches all the way back to Lydia (a part of Turkey) and King Croesus’s creation of coins (560 to 547 BC). Gold and silver coin were also highly coveted because they appeared to be universally admired and the only main currency in international trade. An absence of gold and silver coins effectively meant you could not participate in trade – and for Europe, which coveted the riches and luxuries of Asia, this meant a race to find more gold and silver to pay for imports. Since gold and silver were the only things that could technically act as money, the only way the money supply could increase was by producing more gold and silver, trading goods with other nations, or stealing/confiscating/pirating it from others.

In England, the dominant form of money was silver coin and its production was the purview of the sovereign or monarch. Gold was also used and in circulation but England in the 1600s did not have a considerable amount of gold and did not move to a gold standard until the next century. Lacking any significant gold mines, the English relied on trade to bring gold into the country. Much later, it would extract considerable amounts of gold from its colonial possessions such as Australia. However, the key problem in England in the 1600s was the scarcity of money. A bevy of pamphlets on the money situation of the country clearly identify this problem. It was a major problem because leading thinkers of the time understood that England was becoming more productive and the dearth of money would not allow for the full circulation of goods. Like today, people complained for a want of money. Part of the reason (we won’t go in depth about this here) England was becoming more productive was its use of coal energy – the result of Britain denuding its forests rather rapidly. Since energy means the capacity to do work, with more energy coming online, England could become more productive. Over time, Britain became the first country to achieve sustained economic growth (Wrigley 2010).

So in modern parlance, England’s economy was running far below its capacity for want of money. Recognizing the situation a number of interested parties set forth to find a solution. The most decisive was the Hartlib Circle (a network of friends interested in improvement and science) who operated from 1630-1660. This group arrived at the conclusion that money did not have to be metallic coins. For many, this was hearsay, but necessity forced the idea that money was not necessarily a material thing but a medium of some kind founded on trust. This idea made it possible to conceive of money as credit – as something beyond gold and silver coins. Of course credit in the form of paper notes had long been in existence but it was highly personal, largely untransferable and as such, could not expand the money supply, which was the identifiable problem.

So the key problem was how to expand the money supply. There were many banking precursors Hartlibians and other thinkers could rely on – particularly Italian and Dutch banking practices – but neither would suffice to solve the problem of expanding the money supply. As Wennerlind notes of the Dutch experience:

In fact, England was largely self-sufficient when it came to ideas about credit. While political economists sought inspiration from the Dutch on all matters commercial, their financial innovations were considered inadequate to answer England’s needs and were thus rarely given serious consideration in the English debates. More precisely, because the Dutch did not develop a national debt backed by the nation-state, did not enjoy a liquid secondary market in public debt instruments to complement its stock market, and, most importantly, did not issue a generally circulating credit currency, Dutch finance did not constitute a model that the English sought to emulate directly… On the continent, banks had already transcended the disadvantages associated with the lack of quality coin. The Bank of Amsterdam, founded in 1609, provided traders in the Dutch Republic with a convenient and secure paper currency. However, because the paper currency was fully backed by coin in the vault, the Bank of Amsterdam did not augment the overall money stock, at least not in a significant way. (Wennerlind 2011: 8 and 69).

But while the Hartlibians were concerned to stimulate the economy by introducing more money into the economy, the real innovation of credit money derived from the need of William III and his Parliament to fund a war with King Louis the XIV of France. Traditionally the monarch was responsible for funding all wars out of the royal estate and whatever customary taxes were owed to the sovereign. Hence, there were strict limits imposed upon the monarch in regards to finance, often forcing the Crown to borrow from private subjects to finance war-fighting exploits. This typically meant the accumulation of debt and the alienation of more of the royal estates by sale to private persons. An additional alternative was the leasing of royal lands for a fee or forcing loans – a practice disdained by merchants and moneylenders. Since ordinary people were largely outside of the money economy until the money supply grew and new taxes were issued, the tax burden fell most heavily on merchants and the propertied.

What this amounts to is the simple fact that finding a way to finance war was a key factor in England’s monetary and financial revolution. The answer to the problem was twofold: the creation of the Bank of England and the long-term ‘national’ rather than sovereign debt. Both would arrive on the scene once the propertied of England made the Crown subordinate to Parliament in 1688.

A Scot, William Paterson introduced the scheme for the Bank of England which was chartered in 1694. The bank was given the exclusive right to extend credit to the government at interest. In turn, the government promised to finance the interest on its loans by providing creditors with a portion of its tax revenues. The creation of money was no longer the prerogative of the sovereign but of private social forces interested in the accumulation of evermore money. From the point of view of capital as power, investors in the Bank of England were capitalizing the state’s power to wage war and tax its subjects. After the creation of the Bank of England, taxation exploded in Britain to cover the interest on the so-called national debt – a debt owed to the 1% of bank owners. The British became the most taxed in history. An article appearing in 1820 captured the automatic progression in taxation:

Taxes upon every article that enters the mouth, or covers the back, or is placed under the foot – taxes upon everything which is pleasant to see, hear, feel, smell or taste – taxes upon warmth, light, locomotion – taxes on everything on earth, and the waters under the earth – on everything that comes from abroad or is grown at home – taxes on the raw material – taxes on every fresh value that is added to it by the industry of man – taxes on the sauce which pampers a man’s appetite, and the drug that restores him to health – on the ermine which decorates the judge, and the rope which hangs the criminal – on the poor man’s salt and the rich man’s spice – on the brass nails of the coffin, and the ribands of the bride – at bed or board, couchant or levant, we must pay. The school-boy whips his taxed top; the beardless youth manages his taxed horse with a taxed bridle, on a taxed road; and the dying Englishman pouring his medicine, which has paid seven per cent, into a spoon that has paid fifteen per cent, flings himself back upon his chinz (299) bed, which has paid twenty-two per cent, makes his will on an eight pound stamp, and expires in the arms of an apothecary, who has paid a licence of £100 for the privilege of putting him to death. His whole property is then immediately taxed from two to ten per cent. Besides the probate, large fees are demanded for burying him in the chancel. His virtues are handed down to posterity on taxed marble, and he will then be gathered to his fathers to be taxed no more. (quoted in Davies 2002: 300).

Heavy taxes are the necessary corollary of a monetary system based on money as interest bearing debt owed to the few.

But how was the money supply eventually increased?

Paterson himself was a banker and there is little doubt that he understood precisely what merchant bankers were up to before the creation of the ‘national’ debt and the Bank of England. Like goldsmiths and other bankers, he understood that the gold and silver received on deposit would largely remain at the bank for reasons of security and the convenience of handling paper notes rather than heavy coins. The depositor would simply deposit gold, silver or both and receive a note of receipt. This receipt could then be used for making transactions without bothering with metallic money. As long as depositors were confident they could exchange their notes for their coins, all would be well. Paterson suggested that the Bank of England could do the same but on a far larger scale. He ensured that the credit money issued was backed by reserves of good quality silver coin. He reasoned that the Bank would only have to keep 15-25% of silver in reserve and on this basis, start extending credit. The fact that the notes in circulation were not backed by an equivalent amount of silver coin, of course, was not broadcast to the public. But to shore up trust among the people that mattered to his scheme, Paterson also reasoned that investors/depositors in the Bank could feel secure in receiving payments since Parliament had the right to tax its subjects for payment of interest on the ‘national’ debt. This, in short, was the original means by which the money supply was extended through debt. As one historian of money noted:

When the government established a royal commission to inquire into the activities and reserves of the bank, the bankers would only respond that the reserves were “very, very considerable.” When asked to be a bit more specific, they said that they would be “very, very reluctant” to add to what they had already said. (160).

But to make this sleight of hand system work, investors were capitalizing far more than the ability of the Bank to profit off the ‘national’ debt. As Wennerlind has demonstrated, the new system of debt money required the death penalty for counterfeiters. In other words, the exclusive right to create money demanded the violence of the state. Dozens were put to death at the hands of Sir Isaac Newton – who accepted the responsibility for catching counterfeiters as the Master of the Mint.

This was not necessarily a new practice. Historically, people found counterfeiting were subject to all kinds of gruesome torture and often death (true as well in China). But it was difficult to know the true source of counterfeiting and thus it was difficult to punish and thus create deterrence by providing a symbol to others. The creation of debt money reinforced the impetus to find and punish counterfeiters. In this sense, early investors in the Bank of England were capitalizing the state’s power to command the death of its subjects.

But killing counterfeiters was not enough to ensure the monetary revolution and the security of the new organized creditors. Since excessive taxation was unpopular, the national debt could be funded in another way: the transatlantic slave trade, the trafficking of human beings from West Africa to Spanish America and ultimately the British colonies. Towards this end, the South Sea Company was established to help fund the national debt and service the interest owed to investors in the Bank of England. The company had the ‘right’ to transport and sell 4,800 slaves to the Spanish colonies per year. In effect then, investors in the Bank of England capitalized one of the most reprehensible practices in all of human history.

Guarding the exclusive right to creating money as debt also meant sabotaging colonial currency in what we today call the United States. The British colonies also suffered from a dearth of silver and gold to facilitate their trade and repay their debts – many of which were owed to British merchants. The scarcity of money problem was solved – however imperfectly – by issuing debt-free paper currency in relatively controlled amounts. The debates are more complex than I can allow for here, but one thing is certain: the Bank of England wanted to extend its power to the colonies and could not permit the colonists to issue their own currency. This was viewed as a key challenge to the bank’s monopoly on money creation through debt. I do not want to oversimplify or suggest that the origin of the American Revolution is monocausal, but the Currency Act of 1764 goes a far way in explaining why colonists would take the massive risk of taking up arms against their perceived oppressors. Indeed, upon being interviewed by the House of Commons in 1776, Benjamin Franklin said the following when asked why colonists had lost respect for Parliament:

To a concurrence of causes: the restraints lately laid on their trade, by which the bringing of foreign gold and silver into the Colonies was prevented; the prohibition of making paper money among themselves, and then demanding a new and heavy tax by stamps…

The tax was disliked because everyone was forced to pay it and Franklin reasoned that there was not enough gold and silver in the Colonies to pay the tax. He argued that to pay the tax, the colonists would have to be compelled by arms. In this way, investors in the Bank of England were also capitalizing the attempt of Britain to enforce its rule over the recalcitrant colonists once they finally rebelled. After the victory by the colonists, the money problem as well as the debt contracted by the war loomed large in the debates on how to establish a new republic. We cannot entertain these debates here, we only note their importance for the history of banking, state-formation and the creation of money in the United States.

Eventually, states started to adopt (or were forced to adopt) a silver or gold standard – for example Japan adopted a gold standard to participate in international trade. But as I mentioned last week, by the 1970s, this system had proved too restrictive (as it had done so before) and the monetary system known as Bretton Woods was effectively abolished by the United States when it no longer backed its paper currency with gold. Thanks to the massive demand for oil and the fact that other commodities were denominated in US dollars, the Nixon administration could be sure of continued demand for dollars. In most of the world we now have fiat debt money backed only by the force of the government. As already stated, most of this money is lent into the economy when people take out mortgages, credit cards, car loans, student loans, personal loans etc… The more in debt we are, the more money there is and the more bank owners stand to make off interest and fees. This helps us explain why the richest countries on the planet are also the ones with the most ‘national’ and personal debt loads.

But the important thing to know is that the very few capitalize the power to create money as debt and so long as we continue with this system, we can expect many, many morbid symptoms.

It doesn’t have to be this way.

Next week we’ll look at the most egregious consequences of this system.

References

Davies, Glyn (2002) A History of Money: From Ancient Times to the Present Day. (Cardiff: University of Wales Press).
Weatherford, Jack (1997) The History of Money. (New York: Crown Publishers, Inc.)
Wennerlind, Carl (2011) Casualties of Credit: The English Financial Revolution, 1620-1720. (Cambridge, USA: Harvard University Press).
Wrigley, E. A. (2010) England and the Industrial Revolution (Cambridge UK: Cambridge).