Tuesday, August 06, 2019

Plamen Ivanov reveals the strange origin of the Bank of England.

At the pinnacle of our capitalist system is perched the Bank of England which Dr Plamen Ivanov calls 'this key capitalist firm'. An apt phrase given that the Bank has seemed unquestionably authoritative and essential to the economic working of the UK for over 300 years. However, inequality under this system grows despite political efforts to the contrary, so given the premier role of the Bank can it be that it is a cause of the inequality? Or is it just a neutral, disinterested player in a democratic system run by others? Dr Ivanov reveals hidden and barely understood facts around the Bank's origins that befog the truth about the mechanism working our money system even today, and which he does blame for the disparities. He shows that what started in 1694 continues to this day, powerfully unabated through all banks which operate under what amounts to a marketing franchise which originated with the Bank and is regulated by it. The know-how and procedures of banks follow the model, with the result that the loans issued by them brings enrichment to their top managers and shareholders, even today, just as happened for the Bank itself after its formation in 1694 and for 250 years after. But Ivanov is hopeful that all is not lost for fairness, as there are benign banking ownership models for us to follow.   

Dr Ivanov's doctoral paper that explores these themes is The Bank of England: A Socio-Economic Inquiry into Private Money Creation, Public Debt Financing and the Long Run Implications for Inequality in Britain and beyond (Oct 2018) and he acknowledges the insights of Prof. Richard Werner's key credit creation work in the writing of it. It is about how the Bank made waging a long war more possible for the government of the day and facilitated that by taxing ordinary citizens to the huge financial benefit of a small group of Bank directors and shareholders. But he shows how national wealth creation might be made more sustainable and be better spread through logical and proven reforms. Whilst public (government) debt with its constant demand for interest payments is used to this day by politicians as a tactic to impose austerity for citizens, Ivanov questions the need for the national debt at all.

With the takeover of the throne of England by Prince William of Orange of The Netherlands in 1688 a new era of state finance began. For centuries the ancient 'dual policy purpose of a monetary and fiscal tool' - the tally stick system - was a: 'public credit system [which] allowed state bureaucrats to spend beyond the annual tax revenue by obtaining credit from the public via the issuance of receipts of future taxes paid' (p143). The earlier rulers had resorted, apart from this tally stick system, to funding by means including borrowing from goldsmiths, customs levies, other duties and land tax, all of which, contemporary sources acknowledged, had been sufficient to pay for wars. But the new Bank of England introduced a method for government funding through the new national debt specifically secured against new taxation. This relieved the king of money worries in a novel way, and bound the taxpaying people to the enrichment of the Bank's shareholders forever, especially if long wars ensued.

The pressing political scenario preceding Prince William and Mary's English adventure was that Louis XIV of France had been empire-building on the continent of Europe for over two decades. Due to murderous religious intolerance he had caused a mass exodus of Huguenot protestants in 1685 and many fled to The Netherlands and England. As Louis' campaigns grew, unfortunately the Dutch people themselves were losing the inclination to resist and might possibly withdraw from the conflict. William was in danger of becoming isolated from his people in this and engineered to unite his domain with the English so that opposition to Louis would be strengthened with the added clout of another nation in the fight. As it happened  the protestant English were becoming restive about King James II's catholic preferences. So William (conveniently married to his own cousin Mary who was also the current King James II's daughter) saw his chance and invaded Devon with a fleet four times larger than the Spanish Armada - this was to be a campaign for certain victory.  William was rapidly accepted and arrived in London within  a few weeks. James tried to retain his throne but gave up two years later after the Battle of the Boyne (1690). For William the regime change was now complete and within a few months of his arrival in November 1688 as King William had joined an anti-French Grand Alliance of nations on continental Europe that endured as the Nine Years War. England was now locked into the continental conflict.

Ivanov shows how the Bank of England was founded through the influence of the Huguenots behind a marketing frontman, William Paterson. The Houblon family were well established citizens and prime movers with other fellow church people who met in the French Church in Threadneedle Street (the same street as the existing B of E). Their anti-catholic feeling was such that radicals there had been calling for Charles I's head in a sermon in the church four years before the execution. They had been prominent in bringing William across as king, and now, using banking know-how from Amsterdam, they devised the new Bank for the purpose of creating a new national debt for the English to fight the war whilst also bringing benefit to themselves through their personal (merchant) interests: 
         'the state unilaterally appropriates part of the income and production of ordinary taxpaying citizens and reallocates such monetary gains to national debt creditors in order to satisfy interest payments on legal, contractually-binding debt contracts . More precisely, the religious cabal of the French Church at Threadneedle Street, led by the Houblon dynasty, managed to create suitable field characteristics for the erection of a privately-owned banking enterprise to underwrite national debt with the aim of self-enrichment.' p31   

So William secured his new throne, and within a few years, the funds to wage a long war with confidence; the populace were expected to support the idea that the war was a defence of their protestantism; taxpaying citizens paid the interest on the war debt through new taxes; and the Bank shareholders and associated city merchants grew exceedingly rich.  The national debt grew by the end of the Nine Years War to £17m, with taxation guaranteeing the Bank a very profitable future. In 1832 Sir Henry Parnell reported that the then £28m a year in dividends is: 'a transfer of so much money from the pockets of one part of the public into the pockets of another part of it' p107. At that time the interest on the national debt was above 50% of total government expenditure and had averaged nearly 40% since 1700.   Parnell observed the impoverishment of the populace through taxes coincident with the new debt (chart p116) just as Dr Ivanov is showing now. 

Another chart (p133) shows how 'infrequent wars' in centuries prior the late 17th century changed following the start of the Bank. King William's desire to tie England into his continental war adventures and the Bank as a means of funding it, faciliated an increasing numbers of wars since.   

A practice discovered by Ivanov 'this surprising revelation' p72 concerns: a) the amount of the shareholder funds and b) the amount of the loan to the government. Did they match up? The shareholders were to raise £1,200,000 which was to be paid over as a loan of £1,200,000. What Ivanov has discovered is that only 60% of the shareholder's funds were actually subscribed but the full loan was paid over, with the bank issuing banknotes to represent  the entire loan (p31,p72). Ivanov points out this was an act of private creation of credit at will, and out of nothing, authorised by the Crown through Parliament, with the Bank having its monopolistic status made unassailable through a Royal Charter in return for the loan. This monopoly endured for the Bank itself until nationalisation in 1946 and endures to this day for the remainder of the banking industry which grew out of it into the UK and across the globe. 

So part of the loan to the government was 'invented'; there was insufficient gold or silver or whatever stood for acceptable value deposited 
by shareholders in the Bank to back it entirely; so it was a pretence to the government that it was there. The Bank issued banknotes and did whatever was needed for foreign transfers for the war payments abroad, and the paper money was spent among merchants - some being shareholders of the Bank. Money circulated into general circulation buying food and supplies, guns, gunpowder, horses, bridles, etc, to fight the French. 

Dr Ivanov champions two reforms to start to correct the imbalances of wealth and income that have grown up as the national debt pile has been renewed and grown over 300 years. Prof. Michael Hudson is the leading authority on ancient debt forgiveness in Babylonia which has been shown to have been practised when a new king came to the throne. This was to free indebted peasants from crop debts and maintain a free citizenry for public duties attached to their land holdings.  The rulers recognised that debts needed periodically to be cancelled or perpetual debt-slavery would ensue. Moses stipulated debt cancellation every 7 years and a return to ancestral land every 50 years - the Jubilee, Leviticus 25. 
Ivanov quotes Michael Hudson: 
              'Indeed, what turns out to be ironic in studying the history of Near Eastern legal practices is that precisely those parts of the Biblical narratives that hitherto have been most in doubt – the laws of cancelling debts, freeing debt servants and redistributing the land to its traditional users – turn out to be the most clearly documented Bronze Age legacy.' p156

Ivanov says we must somehow eliminate the debt.  As  'two thirds of the national debt is now owned by commercial banks and firms.' p136 to achieve the ancient feature of debt forgiveness, he advocates:   
             'governments may issue usury-free money to repay those layers of national debt owed to banking concerns without the need to resort to a great public sacrifice.' p157.  
   
The other proposal from his paper is the formation of many local community-owned banks as have been existing in Germany for more than 150 years. 
           'all of these cooperatives strictly followed three fundamental principles: they were self-help institutions, relied on solidarity, and were self-administering small financial intermediaries … These cooperatives, which adopted the common name Volksbanken (people’s banks), mainly operated in urban areas’. p160
         'Since ...the 1970, no savings bank has ever been liquidated and no creditor has ever suffered lossess. Rioural and Dawson-Kropf, 2012 p162
 
Dr Ivanov credits local banks with the success of the Industrial Revolution in the UK:
           'The increasing number of local banks in this Industrial Revolution period were drawing on their knowledge of local customers and their creditworthiness, financing the expansion of entrepreneurial activities and as a result national output (Cottrell 1980). This decentralised industrial planning through the lending policies of the growing number of countryside bank concerns was lost with the commenced centralisation of banking in London-based headquarters towards the latter end of the 19th century. This process gave rise to the domineering transactional lending approach which still troubles the British trade performance' p167
The community bank model does not involve the nationalisation of banks - which introduces the dead hand of central decision making - but moving ownership to new local, community-profiting banks which would manage themselves independently, and create money to finance local businesses and needs.     


This paper is key to the understanding and resolving of economic problems as the wealth and income gap widens. Dr Ivanov's narrative style and his detailed research, convinces. The fundamental rip-off through taxing the people to finance the national debt which was owned by wealthy people (who even invented the money lent out), is almost past belief. Even at the time alternative ownership was proposed by William Paterson who wanted the debt to benefit orphans. But Dr Ivanov gives reasons for hope for us in our day that the slate can be wiped clean and money creation transformed into benign ways. 

The Bank of England at its birth and for centuries was efficient at financing war, so surely its managers can now inspire us all and enlighten the government to direct finance to make a fairer society? They have immense power to create money for the common  good.  

Do not withhold good from those to whom it is due, when it is in your power to act. Proverbs 3.27   

Posted by Charles Bazlinton. Author, The Free Lunch - Fairness with Freedom.
Charles Bazlinton is a director of Local First CIC which promotes local banks 
 

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