10 How did the Financial Economy come to Dominate the Real Economy?

One of ten essays R.H. Tawney[1] wrote for his introduction to the 1923 edition of Thomas Wilson’s Discourse Upon Usurye was entitledThe Antecedents of Banking.[2] Tawney does not dwell on the Goldsmiths,[i] arguing instead that the Scriveners were the key players in the development of England’s exchanges in the 16th Century.

‘The Scriveners had originally been expert amanuenses or notaries, on whom an illiterate age depended for the drafting and engrossing of documents, such as business contracts, wills and conveyances, insurance policies, or the ordinances of a company, which required to be put into due legal form…The constant mortgaging of land, and the growing dependence both of Landowners and Traders on credit transactions, involved a great increase in the half-clerical, half-legal business of ‘making bonds’[and this] made the Scrivener at once more dispensable and more expert, and put considerable sums of money into the pockets of the more successful members of the profession.’

From being advisers, the Scrivener becomes a Financial Middleman, handling the kind of business done today by a certain type of Solicitor. The Borrower who does not know where to turn consults a Scrivener.[ii] The development of the Scrivener did not end with mere broking. His intimate knowledge of business conditions and of the land market, his practice in weighing the standing of Moneylenders and their clients, and his sometimes not inconsiderable wealth, made it inevitable that, in addition to arranging loans, the Scrivener should himself take to lending money.[iii]

It is absurd, as Tawney pointed out, to view the founding of the Bank of England Company as the origin of banking in England but it represents a pivotal moment. The idea of playing both ends against the middle was revived in Stockholm in the 1760s.

The experiment failed but was taken up by the Dutch who designed the more successful Bank of Amsterdam. When James II ran away to France in 1688, leaving the field clear for the bloodless revolution that brought William of Orange to the English, Scottish and Irish thrones, Dutch financiers flooded into the country in his wake. In 1694 they were given a Royal Charter to set up a finance company in England along Dutch lines. Here is Marx at the end of the first volume of Capital describing the Company of the Bank of England:

‘At their birth the great banks, decorated with national titles, were only associations of private speculators, who placed themselves by the side of governments, and thanks to the privileges they received, were in a position to advance money to the state…the bank of England began with lending its money to the government at 8%; at the same time it was empowered by parliament to coin money out of the same capital, by lending it again to the public in the form of bank notes. It was not long ere this credit money, made by the bank itself, became the coin in which the Bank of England made its loans to the state, and paid, on account of the state, the interest on the public debt. It was not enough that the bank gave with one hand and took back with the other; it remained, even whilst receiving, the eternal creditor of the nation down to the last shilling advanced.’

Here we see Marx showing a much greater understanding of money than in his formal definitions of money as gold and silver commodities.[iv] His use of the term ‘barren money’ in the following statement suggests more than a passing familiarity with the usury debates of earlier years and of Aristotle’s concepts of money.

‘The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and this turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state-creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would.’

Unfortunately from the point of view of ordinary people the 1694 Dutch model is seriously flawed. But it was never meant for them. It was a deal reflecting the needs of the Crown and the commercial ambitions of the merchants. It was designed to finance the state to fight its wars and keep the Pope at bay and to permit the steady accumulation of improperty[3] by rich families over the generations. It has done it extremely well. So well in fact that it has been copied many times. One of them is the American Federal Reserve.

Stephen Zarlenga has summarised the nature of this generic process by drawing the historical parallels between the establishment of the Federal Reserve System in 1913 and the Bank of England in 1694.[v] In both cases the founding process involved: secrecy[vi]; wealthy private backers[vii]; designed complexity[viii]; deliberate deceit in the pretence that they were public bodies[ix]; subsequent disaffection by the original founders[x]; false impression of gold backing[xi]; and the onset of war shortly after the financial manipulations began.

Since 1694 the Dutch model has been exported around the world. There were 121 at the last count with a bankers’ bank to harmonise their activities in Zurich, Switzerland called the Bank for International Settlements (BIS). Earlier this year it started to warn of a Great Depression[xii] On 8th August 2008 the contributing editor to the Financial Times Niall Ferguson took up the cry with an article[4] about the coming Perfect Storm.[5] This integrated network of central banks has been steadily removing national sovereignty by hijacking the emission of national currency.

The report Sovereignty[6] & Seignorage[7] – The Legal Privilege and a Financial Mechanism of Nation States[8] was written to address the issue at the request of Peter Roderick[9], former lawyer for Friends of the Earth and Director of the Climate Justice Programme who gave a talk at the seminar of the Environmental Law Foundation[10] on the Legal and Environmental Challenges of Climate Change in 2004.

The sovereignty of a nation state includes the emission of a national currency. In the UK the picture of the Sovereign illustrates the monarchic tradition behind this power. Similarly, seignorage is the income that the State earn from the cost of minting coins and printing notes and their actual face value. Of course this cost goes down dramatically as soon as digital money is introduced. However, the banking system has deprived the treasury of this income. In fact, it has gradually eroded the power of Westminster to such a degree that the City rules by financial power not by democratic election.

[i] ‘The simple theory derived from the “Mystery of the Newfashioned Goldsmiths or Bankers,” (footnote: 1676. Printed by Price, The Grasshopper in Lombard Street) and repeated by one economic historian after another, requires to be revised. That famous tract was avowedly an attack upon one particular class of financier; it was written thirty years after the events which it purported to describe; and it completely ignored the whole mass of financial business which for centuries had been carried on by money-lenders of other kinds. “The importance of the goldsmiths in the evolution of banking, especially after the Restoration, is not, of course, in question, and the forces which concentrated business in their hands towards the middle of the century is an important and neglected problem in the early history of banking. But they merely supplied one tributary to a stream which was fed from a multitude of different sources.’

[ii] The Scrivener, who is in touch with the city, introduces him to a ‘friend’. When the parties meet, ‘the royal Scrivener, with deeds and writings hanged, drawn, and quartered’, is in attendance, and drafts the agreement. Such Brokers naturally held a position of some influence on the edge of the business world.

[iii] The State recognised their growing importance; fixed in the reign of James I the fees which they might charge for procuring loans or making bonds’; in its occasional outbursts of righteous indignation against the Extortioner issued Royal Commissions to enquire into infringements of the Laws against Usury, in which Scriveners and Usurers were included in a common denunciation; and pardoned the influential members of the profession when its zeal was spent. Nor did

[iv] As far as money is concerned Marx’s concept mirrors Adam Smith’s. They were both essentially metallists and shared the same commodity concept of money. Marx writes in the first of his three volumes of Capital (the fourth was the work of Karl Kautsky and volumes five and six were never written): ‘Throughout this work, I assume for the sake of simplicity, gold as the money-commodity. Gold, the equivalent money par excellence.’ The same view is repeated in the second volume: ‘For the sake of simplicity we regard only gold as material for money’. And in the third volume: ‘It should always be borne in mind that…money- in the form of precious metal – remains the foundation from which the credit system, by its very nature can never detach itself’. Regarding paper money, Marx wrote: ‘Paper money is a token representing gold, or money…only in so far as paper money represents gold, which like all other commodities has value, is it a symbol of value’. Marx, like Adam Smith, avoided any discussion of the pivotal Mixt Moneys of Ireland case of 1601 which reaffirmed the legal nature of money.

[v] Page 525-528 in The Lost Science of Money by Stephen Zarlenga(American Monetary Institute, New York, 2002, 725 pages; ISBN: 1-930748-03-5).

[vi] First, the secret efforts surrounding the formation and passage of the legislation for both institutions. In Paterson’s description of how the Bank of England’s legislation was promoted, we read: “All the while the very name of a bank or a corporation was avoided, though the notion of both was intended…” The Bank of England legislation was not even framed in its own act, but quietly passed as a rider to a shipping bill. With the Federal Reserve, we see the manoeuvres of creating the temporary Aldrich-Vreeland system; the secret Jekyll Island meeting; the disguising of the Republican bankers’ bill as a Democrats’ bill; and the bankers pretending to oppose their own bill!

[vii] Both laws depended heavily on wealthy and more sophisticated foreign supporters and organizers. The Bank of England was organized largely by Dutch and Jewish financiers, who provided the formula and the impetus for it. The formula for the Federal Reserve System came largely from the Kuhn Loeb bankers connected with the European Rothschild interests; for Paul Warburg’s overriding importance in the formation of the Federal Reserve System cannot be denied. The impetus also came from Morgan and it could not have been done without the complicity, support and organization of America’s financial establishment.

[viii]Both institutions were very complex and not understood. This resulted partly from the need to cloak their effect – to obscure that the nation’s sovereignty over its money was being transferred to private persons. Paterson wrote that few persons could understand the Bank proposal. And few could understand the Federal Reserve. Even among the American press: ‘The Nation magazine was the only public organ, so far as I can find out, which pointed out that the issue of the money of the U.S. was being turned over to a body of men who were neither elected nor answerable to elections,” wrote Mullins. ‘This lack of understanding was further compounded by the vagueness of the act itself. Milton Friedman and Anna Schwartz [A Monetary History of the U.S. 1867-1960. National Bureau of Economic Research, Princeton University Press, 1971] pointed out that: ‘The Federal Reserve System therefore began operations with no effective e legislative criterion for determining the total stock of money…the discretionary judgement of a group of men was inevitably substituted for the quasi-automatic discipline of the gold standard. Those men were not even guided by a legislative mandate of intent (except the title of the act).Even within the Federal Reserve itself, almost no one besides Paul Warburg and Benjamin Strong had a clue as to what would happen: ‘In 1914 when these 12 banks were organized, a large staff of officers were gathered from all parts of the country and to them was delivered…just exactly what is contained in the Federal Reserve Act – and no more. With the exception of Paul Warburg and the writer, there was not one man in the entire organization who ever had the slightest experience in foreign banking, nor the opportunity to study the methods and policies of the banks of issue of Europe,’ wrote Benjamin Strong, the first President of the New York Federal Reserve Bank. [In a letter from Strong to J. Hollander dated January 3rd, 1924, quoted by Lester V. Chandler in Benjamin Strong, Central Banker, Washington: Brookings, 1958) p. 17]. ‘This lack of understanding continued for decades as evidenced in Thomas E. Dewey’s questions to Marriner Eccles (then Chairman of the Federal Reserve System) in a June 17, 1942 appearance before a congressional committee…Dewey was no slouch; he was to become Governor of New York, and nearly defeated Truman for the presidency in 1948; yet he had trouble grasping how the Federal Reserve created money out of thin air. He probably had believed the normal misinformation that banks mainly relend money that their depositors place with them

[ix] Both institutions were privately owned but made to appear as government bodies.

[x] Some important early supporters would later condemn both institutions. In the case of the Bank of England, William Paterson became so disaffected that he published a book condemning the Bank’s build-up of the national debt. [see Bannister, Saxe: William Paterson; Edinburgh; Nimmo; 1859 and also The Writings of William Paterson, 1859, reproduced 1968, New York, A.M. Kelley]. And with the fed, several important early supporters regretted it later. William Jennings Bryan would write: ‘In my long career, the one thing I genuinely regret is my part in getting the banking and currency legislation enacted into law.’ Woodrow Wilson also regretted his role and later wrote a scathing statement against the Money Power.

[xi] Both institutions gave the impression that their notes were backed by gold. In fact the Federal Reserve’s notes (not its created deposits) started out as gold backed, but would soon be changed.

[xii] On 9th June 2008, Gill Montia in Banking Times, reported that the latest Quarterly Report from BIS noted that the Great Depression of the 1930s was not foreseen and that commentators on the financial turmoil, instigated by the US sub-prime mortgage crisis, may not have grasped the level of exposure that lay at its heart. She reported the BIS as writing that ‘complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression’. The report also pointed out that between March and May interbank lending continued to show signs of extreme stress and that this could be set to continue well into the future. Concerns were also raised about the Chinese economy and whether China might be repeating the mistakes made by Japan, with its so called bubble economy of the late 1980s. Ominous talk that sends out a signal to get deglobalising fast. No doubt the announcement came after the insiders had finished doing so.

The Growth of Credit, Government Budgets and Cash since 1999

The Growth of Credit, Government Budgets and Cash since 1999

The light beige columns are Government Budget figures. They are less than half of the Credit figures and don’t grow nearly as fast as Credit.

The ’growth’ of the economy, in reality, is the growth of Credit that fuels the financial economy with devastating effects.

3 responses to “10 How did the Financial Economy come to Dominate the Real Economy?

  1. Pingback: Green Growth = Genuine Growth of the Real Economy « How is Green Growth Possible?

  2. Pingback: 5000 emails to bankingcrisis@parliament.uk « In the Spirit of the Forum for Stable Currencies

  3. Pingback: The City of London Corporation: the state within a state « Money as Debt also known as Credit

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