CENTRAL BANKS AND HOW WE GOT THEM

Debt goes back to medieval times and times have not changed much since then:

By Melvin J. Howard

There is nothing wrong with debt, when used healthily as a tool to create wealth. But when it arises, as it mostly does, from fear, feeling of lack, and negative self-worth beliefs, then it is a control game being played, a painful one at that. Additionally, what most people don’t know is that debt, in our current civilization’s monetary system, is designed to collapse for a certain number of its holders that’s right no joke. Before cash money was invented in its present form, people used to trade by barter. They would exchange goods and services. Finally, one day, a powerful merchant family named the Medici family of Italy (powerful merchants and later bankers who ruled through influence between the 13^th and 18^th century) said, “We have another way we can do this. We can make promissory notes we shall call money. They are more convenient to carry than goods and gold.” The first paper money worked as follows. A trader would go exchange his or her goods for gold. They then take this gold to deposit it with the Medici, and the Medici write up a paper with their signature and family seal, a paper that would represent the gold that was deposited with them. This paper, upon return to the Medici, would be exchanged into its gold equivalent. That concept is where the gold standard came from. Now let us look at debt. Imagine that the Medici have just opened up their first bank and announced the new scheme to the traders. So one trader, let us call him Mel goes to the Medici and deposits $100 worth of gold. The Medici make up a paper saying that they promise to exchange that paper for $100 worth of gold upon its return (less a banking fee, plus an interest, whatever). Mel takes this paper and goes home. Mel can use this paper to buy things, but let us assume he does not. So far, he is the only customer at the Medici’s new bank. Now Michelle, another person, wants to start a new business, a hotel. She has the land and building but needs some pots and pans.

She does not have any goods to trade in exchange for pots and pans, but she’s hears that the Medici are giving “loans”. So she goes to the Medici and asks for a $100 loan. The Medici says they can do that, but Michelle has to pledge her land and building as a security, collateral, in case of default. The Medici make up money (money that did not exist) by writing up a new paper, sign and seal it, and give it to Michelle. (How did the Medici bank get the money? The same way the Federal Reserve makes U.S. dollars, contrary to most people’s imagination that it is backed by something.) The condition is that on return, Michelle has to give back $100 plus $10 interest. Now freeze that right there. Imagine that Michelle and Mel are the Medici’s only two customers at the time. This means that the economy only has two paper notes out there, one with Mel and one with Michelle. And Michelle has to return her plus $10. Where will Michelle get that $10, unless Mel comes and rents a room at Michelle’s hotel for $10? The Medici did not print the extra $10! So even if Michelle is hyper-careful with her loan, even if she does not spend it at all but returns it after a year, the $100 intact, it is physically impossible for her to pay the $10 interest. This is because she cannot print the extra $10 money and Mel does not want to spend his money at the hotel, yet Mel is the only one with the only other note printed! Do you see the error in this system? Even if Michelle now has goods to trade, she cannot trade them for paper money because there is no more out there – and the Medici wants cash money or the collateral. Michelle will have to lose her hotel to the Medici simply because of a paper shortage error. She has the original $100 they gave her because she did not spend it, but she cannot possibly get the $10 they want in addition as interest, because she can't print money nor does the only other person with bank notes want to stay at her hotel and pay cash.

Her hotel may be highly successful, renting rooms in exchange for goods, but she still would not have the printed paper for $10 that she has signed to give back to the Medici as interest. So her hotel would have to be seized by the bank. This example shows exactly how our modern civilization’s debt system works. But because there are millions of people playing this game, the players don’t realize there is a problem because only 8% of people are caught by this error (about 8% of all debts are un­payable). And those that are caught by this error think there is something wrong with them only they never imagine that the system itself is flawed!

Debt, by its very nature, in our current financial system, is designed to fail for a certain percentage of the population, no matter how much effort or care they put. And it is so simply because there is not enough money created (printed) for the interest requested. The only reason this illusion has managed to run this far is that there are millions of players rotating the money and it looks like it works for most people, which makes the few it doesn’t work for look like something is wrong with them and not the system. Every now and then, the debt bubble bursts, but someone somewhere comes along and rescues it, again with more debt and more conditions of control. It happens to individuals, companies and countries. And it keeps rising, getting bigger and bigger.

This is not the time to blame the issuers of debt, or anyone else for that matter. There is no judgment or guilt in the matter. Only energetic facts. The minute you start playing the blame and judgment game, you enter into a victim position, and that is no good for you.

There is nothing wrong with debt, when used as a tool I repeat as a tool. But when it arises, as it mostly does, from fear and negative self-worth beliefs, then it is a control game being played, a painful one at that. A game we created and continue to create day in day out.

 CENTRAL BANKS AND HOW WE GOT THEM

In the Middle Ages most of the banking functions were performed by Jews (who were immune from Christian prohibitions against charging interest on loans) and Knight Templars (monkish knights whose honesty and fierceness had earned them a reputation for safeguarding wealth). King Philip IV of France expelled the Jews and confiscated their property before ambushing Templar leaders, executing them and confiscating Templar property. Banking re-emerged in the Renaissance among the merchants of Northern Italy. However, the Florentine family banks were devastated in 1343 when the British monarch Edward III defaulted on his loans. Many depositors were also left destitute. Nonetheless, a century later the Medici family became the greatest of the Renaissance bankers until Charles VIII of France invaded Italy and confiscated most of their property. Fractional reserve banking (lending money given for safekeeping was considered fraudulent when done without the consent of the depositors) had been practiced during this period -- sometimes with disastrous consequences. Florence is also credited with such innovations as bills-of-exchange, double-entry bookkeeping and checks (checks) on deposits. The Bank of Amsterdam was founded in 1609 as a "safekeeping bank" based on the principle of 100% reserves (in contrast to fractional reserves). Gold is bulky and risky for a person to hold in large quantities, so a 100% reserve bank served a valuable service by storing the gold in a safe place and issuing receipts (banknotes) for the gold. The banknotes were more convenient to trade than the heavy gold, especially for large transactions. Thus, the banknotes could serve as money.

Under the demand-deposit system, however, even banknotes become unnecessary. A depositor only needed to write a check or transfer order to the bank directing that his/her gold be transferred to another person from whom the depositor had purchased goods. A bank such as the Bank of Amsterdam that operated with 100% reserves was functioning as a money-warehouse. For sake of example, imagine that on the island of Fantastica (as described earlier) the entire 1000 silver coin money supply was deposited in the Bank of Fantastica as demand deposits. Island inhabitants could write checks on their deposited silver coins to direct transfer of coins to another depositor when a purchase was made from that depositor. Suppose the Bank of Fantastica then issued 1000 silver coins worth of loans to other Fantastica inhabitants -- also in the form of demand deposits. Now the Bank of Fantastica would have recorded on its books 2000 silver coins worth of demand deposits: 1000 from the original depositors and 1000 from those receiving loans -- although there are actually only 1000 silver coins in the bank. The money supply on the Island of Fantastica has doubled, which would have the effect of doubling prices (as in the previous example). The Bank of Fantastica has engaged in fractional reserve banking using a 50% reserve -- creating 100% inflation. Fractional reserve banking is fraudulent if done without knowledge and consent of the depositors.

The character of central banking was established early with the world's first central bank, the Riksbank in Sweden. Under the authority of the Parliament charter of 1668 banknotes from Riksbank were Sweden's only paper money, redeemable in precious metal. In exchange for this charter the bank agreed to loan money to the government. In 1720 when the government failed to repay a loan, panicked citizens tried to redeem their banknotes from the insufficient reserves held at Riksbank. To deal with the crisis, Parliament declared Riksbank notes to be legal tender that satisfies any claim to payment -- without the requirement to redeem in precious metal. Central banking in Britain arose from a more competitive tradition. Since the early 17th century British goldsmiths had been issuing deposit receipts for gold held for safekeeping in their "strong rooms" -- and these receipts were circulating as money. In 1694 William of Orange was desperate for money to finance his war against France so he authorized the creation of the Bank of England by a Scottish promoter. The Bank of England issued banknotes, most of which were used to buy government debt. Impressed by the royal authorization of the institution, many British citizens deposited their gold with the Bank in exchange for receipts or banknotes. But fractional reserve practices led to a disastrous bank-run within 2 years. The government defended the Bank of England by allowing the Bank to suspend all payments for 2 years. And the Bank of England continued to help the government with its need for financial assistance.

Private banks competing with the Bank of England received a boost in business in 1730 with the advent of the printed check. The Bank of England's efforts to finance the war against France and the outflow of bullion to private banks led the Bank of England to suspend its obligation to repay its notes in gold in 1797. The Bank did not reinstate a gold repayment system until 1821. Central banking was formally instituted in Britain by the Peel Act of 1844. The Bank of England was granted a monopoly on the issuance of banknotes. Private banks could only hold demand deposits (checking accounts), redeemable in Bank of England notes. Britain was the first Western nation to adopt this central banking structure and the United States was the last.

Early in the revolutionary years, the American Continental Congress authorized paper bills ("continentals") which were supposed to be worth one Spanish dollar (peso). Despite threats of severe penalty for traitors who would not accept continentals, their value inflated by a factor of 75 within 4 years. In partial reaction against the tendency of governments to print inflated currencies, Article I Section 10 of the U.S. Constitution stated that "No State shall ... make any Thing but gold and silver Coin a Tender in Payment of Debt.

The Democratic Party of Thomas Jefferson stood as the defender of hard money for most of the 19th century. The Second Bank of the United States was a weak attempt at a central bank (it lacked a monopoly on banknotes), but its central banking powers were nullified by Democratic President Andrew Jackson in the 1830s. Hard-money Democrats were able to restore the gold standard in the United States in 1879. But the National Banking Acts enacted during the Civil War had destroyed the issuance of bank notes by state chartered banks and monopolized the issuance of bank notes for a few federally-chartered national banks. In 1913 (with strong backing from the Rockefeller and Morgan banking interests) the Federal Reserve Act brought a central banking system to the United States. Mostly every country has a Central Bank although they are supposed to run independent of the Government. Some Governments have a very strong influence on some of the decisions their Central Banks make.