The likelihood is that the economies of Western
Europe and America, now facing disaster, will be
ultimately saved in a similar way to how the
English economy was saved in 1694. Well . . . to
be correct, it wasn't so much that England's
economy was saved in 1694, but England's very
existence as an independent nation. At that time,
the French government, fancying the wealth of
England that was just beginning to industrialize,
was massing troops on its side of the Channel and
was imminently threatening to invade. Taxation
being too slow to collect, King William's
government suddenly found itself needing money to
raise an army and build more ships as quickly as possible.
However, there was a problem. Although there were
two or three hundred extremely rich international
merchant traders and goldsmiths in London with
more than enough money to equip several armies
they were unsure of the stability and probity of
King William's Government. In living memory
(1672) they'd been bitten once before when King
Charles II had reneged on his debts to some of
them. However, they themselves faced being ruined
if the dreaded French invaded so they had to devise a plan.
It was already the case that, for mutual everyday
help, the London merchants were already grouped
together in what can be called proto-banks (also
known as bill brokers or discount houses). So
long as they could trust one another, individuals
within and between these groups could create and
exchange credit by means of writing promissory
notes to one another, balancing up with actual
cash on clearing days. On this occasion, some of
the groups coalesced (over 40 individuals
altogether) and decided to form a 'super-group'
which they called the Bank of England. They
offered to lend £1,200,000 at 8% interest (quite
a modest rate at that time) to William.
But they couldn't necessarily trust King
William's Government (beyond being able to fight
the French), and their offer depended on a few
quid pro quos. The most important of these was
that the new Bank wanted to monopolize all of the
Government's financial business. Because
government taxation tended to come in as pulses
on four 'quarter days' during the year, ownership
of the accounts would mean that the directors of
the Bank could get first-cut from the taxation
moneys received in order to repay themselves with
interest and also the opportunity to make
short-term loans to others and receive additional
interest. It was a wonderful way of saving the
nation and making themselves even richer.
The second big concession they demanded, and
received, was that their own promissory notes
should become the official banknotes of England.
Although there were many other varieties of
promissory notes in use by private groups both
then and in the following decades, this privilege
ensured that the Bank of England's banknotes
could start to be used to pay taxation as
alternatives to gold and silver. Thus everybody
was encouraged to use the Bank's banknotes.
Of course, the initial Bank loan to William's
Government was in gold and silver, the universal
currency that was common throughout the world,
from Ireland through to Japan, but after then the
Bank of England's banknotes could thus be used
widely for domestic use (not for international
trade, of course). In theory, the Bank's
proprietors could, at trivial cost, print as many
of these as they liked and become as rich as
Croesus. In fact, they didn't. Being sensible
people with a thorough knowledge of industry,
trading and finance they only issued new
banknotes by selling them for gold and silver.
They knew that, like some sensible economists
today (that is, those who consider 'Quantitative
Easing' to be foolhardy), there is no such thing
as a free lunch and they had make sure that they
didn't cheapen the value of their banknotes. If
money is inflated by excessive printing then,
sooner or later, the country that issues it is
either defrauding its people (particularly those
who save money) or ultimately faces disaster.
Besides, the Bank's proprietors wanted to make
sure that they, and their descendants, besides
being able to remain rich would also retain their
high social status as being trustworthy.
In due course, the idea of a central bank with
unique powers was copied by other countries which
needed to raise large amounts of money to equip
armies which, due to artillery innovations, had
become very expensive. In modern times, however,
governments have snatched back most of the powers
that they were obliged to give to the central
banks. All central banks, whether as powerful as
the US Federal Reserve or the People's Bank of
China, are today not independent, as they are
often claimed to be. That's merely propaganda. In
truth they are little more than departments of
governments with most of their senior personnel
appointed by their governments. They may seem to
be independent sometimes when the cliques that
run them are at variance with the cliques that
run government treasury departments -- as they
often are -- but, essentially, central banks
print money and set interest rates for the
political convenience of their governments.
Which now brings us to where we are today. The US
Federal Reserve and almost all the central banks
of Western Europe are now themselves effectively
bankrupt. Strictly speaking, they and their
governments are illiquid rather than classically
bankrupt. In principle, they've no need to be
bankrupt because the countries in which they
reside are still wealthy with more than enough
assets and human skills to keep their economies
going. The problem is that those who have money
-- rich investors and, more importantly, pensions
and investment funds -- are becoming increasingly
reluctant to lend it. Government bonds are not as
secure as they used to be. The reason for this is
that the methods that governments use --
tinkering with interest rates or printing
banknotes -- are no longer having any effect at all on their economies.
Where, oh where, are the rich London merchants of
yesteryear? Superficially they appear to be
their modern equivalents -- the high-street banks
and the investment banks. But most of those are
bankrupt or illiquid also. The reserves they have
are either property collateral which they can't
sell at the price it used to be or government
bonds which are now becoming increasingly
difficult to sell with every passing day. Of the
two principal government bonds in the world, the
Eurobonds are fast becoming impossible to buy or
sell, and the credibility of US Bonds now depend
on what the US Congressional 'Super-committee'
can conjure up in the next two weeks by way of
rescuing the dollar from oblivion. The signs are
-- heavily -- that it will fail and only come up with trivialities.
But we still have thousands of rich entities in
the world. Not only are they rich, with swollen
bank accounts at the present time, but they also
know, unlike governments and central banks,
exactly how to create wealth in detail -- just as
the London merchants used to (they had to know
the details of industry as well as finance). I
write, of course, of transnational corporations
and hundreds of thousands of smaller businesses
which depend on them. When the equivalent of the
1694 French troops are massed in sufficiently
high numbers on the other side of the Bankruptcy
Channel, then I think we can be reasonably sure
that the transnationals (of the West and of
China) will come forward with their plan. Of
course, they will want their quid pro quos also.
They'll need to establish their own new brand of
world currency and effectively monopolize, at
least for a while, its supply in order to keep
the world economic system going. Suitably
re-sized governments and politicians who've
learned some basic economics can emerge later.
Keith
Keith Hudson, Saltford, England http://allisstatus.wordpress.com/2011/11/
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