Mortgaging the Nation

The origin of the fiat money system.
From the November 1998 Trumpet Print Edition

The global fiat money casino known as the international financial system originated, in its modern form, in England. Before sailing for London to replace the Catholic James II on the English throne, William III received a loan of 2 million Dutch gulden to take him across the channel. Safely on the throne, the new King nevertheless found himself short of money to finance his war against Louis XIV. Unable to ask the English Parliament to vote him the money because the war, though important for Holland, was of no interest to England, William persuaded the Government to accept the offer of a loan of £1,200,000 made to him by a Mr. Paterson, acting on behalf of a private syndicate, the composition of which has remained obscure.

The proposal in question was that a corporation to be called the Bank of England should raise the sum from the public and lend it on to the King at 8 percent per annum plus £4,000 a year by way of expenses. Since these terms were somewhat more favorable than could have been obtained from the goldsmiths of the city of London, the offer was accepted.

Overnight, the Bank of England, a private corporation, became the beneficiary of a number of privileges, the most important of which was that it was entitled to issue notes under the “common seal” of the Crown and the Bank up to the value of the loan and on the security of the Government. Thus, when a holder of the Bank’s notes presented them to be cashed, the Government would be obliged to raise the same amount in taxation, in order to refund the Bank. This meant that the Bank used the wealth of the nation as guarantee for its notes—which, as Mr. Paterson subsequently explained, were made by it at zero cost (apart from the cost of printing and paper). “The Bank hath benefit of the interest on all the moneys which it creates out of nothing,” he added.

The author Christopher Hollis, writing in The Two Nations [London, Routledge and Sons, Ltd., 1937, on pages 30 and 33-34], explained that “the £1,200,000 was easily subscribed. The Bank, however, did not hand over the whole sum to William in cash. It handed over £720,000 in cash and the remaining £480,000 in notes ‘under their common seal.’” Since the Government then began using the Bank’s notes, the Bank of England gained prestige, and was the possessor of £720,000 in notes “under their common seal” and £480,000 in cash. Hollis continued: “Now William, in the difficulties of previous years, had been reduced…to issuing tallies in lieu of payment of his debts. The Bank now determined to use its spare cash and notes to buy up these tallies at a considerable discount, usually of 7 percent.” Thus the Bank acquired at no cost to itself the title to real wealth in the amount of £480,000 in notes lent to the Government and the additional amount of the tallies bought up with more notes. Before long, the Bank began to print notes beyond the authorized amount of £1,200,000, issuing them signed by the Bank of England’s cashier alone, instead of jointly with the Crown “under their common seal.” Bishop Berkeley described this scam as a “a public cheat,” but the Bank got away with it—as the Crown was preoccupied, indifferent to or ignorant of what was going on, or else considered itself powerless to intervene.

Accordingly, in 1696, within two years of the Bank’s foundation, although the King had only received £1,500,000 (the original £1,200,000 plus £300,000 borrowed in Holland), he was now in debt to the Bank in the sum of £3,034,576 16s 5d. In the meantime, by August 1695, the price index has risen from 100 to 137. By 1698, the National Debt totalled £16,000,000, and it went on increasing thereafter. As Christopher Hollis pointed out, “As an abstract proposition in financial theory…the King might have cancelled the privileges of the Bank and have filled the gap with paper money of his own. But…by the Bill of Rights in 1689, he was prevented from doing this without the consent of Parliament—which meant in practice without the consent of the Bank of England.”

Previous practice had been for the sovereign to make the nation’s money, in amounts corresponding to the estimated needs of the economy, and to spend or issue it into circulation. Under the new system introduced at the end of the 17th century, the King not only authorized the banks to make the nation’s money, but also agreed to borrow it from them at interest to finance his administration. The interest would be paid by the taxpayer; and since the money paid by the bankers was guaranteed by the wealth of the nation, the taxpayer ended up paying interest on what was really his own property.

Thus the revised system effectively mortgaged the wealth of the nation to the bankers, placing the Bank of England effectively in charge of economic policy, and firmly establishing a monetary system based on usury.